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Indonesia Monetary Policy August 2019

Indonesia: Bank Indonesia cuts rates for second straight meeting in August to spur growth

At its 21–22 August monetary policy meeting, Bank Indonesia (BI) lowered the seven-day reverse repo rate from 5.75% to 5.50%. The move took markets by surprise, although several FocusEconomics panelists were expecting a cut in the third quarter. The Bank also reduced the deposit facility and lending facility rates by 25 basis points each, to 4.75% and 6.25% respectively.

The Bank justified its decision by highlighting waning global economic growth and escalating trade tensions, which pose downside risks for the economy. In fact, the less favorable international environment has already hit the external sector, as reflected by merchandise exports shrinking for nine straight months up to July. On the price front, inflation is muted, while the rupiah is still up since the start of the year—despite losing ground recently following the escalation of the U.S.-China trade spat—providing space for further monetary loosening.

In its communiqué, BI stated it will maintain “an accommodative policy mix in line with low inflation forecasts, maintained external stability, and the need to continue to drive economic growth momentum”. This suggests that more rate cuts should not be ruled out going forward. That said, the Bank’s desire to ensure the stability of the rupiah and trim the current account deficit could limit the pace and scope of further easing.

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