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Indonesia Monetary Policy February 2020

Indonesia: Bank Indonesia cuts rates in February to offset coronavirus impact

At its 19–20 February monetary policy meeting, Bank Indonesia (BI) trimmed the seven-day reverse repo rate to 4.75% from 5.00%. The Bank also cut the deposit facility and lending facility rates by 25 basis points to 4.00% and 5.50% respectively.

With inflation comfortably within the 2.0%–4.0% target range, the Central Bank felt it had space to cut rates. The Bank spoke of “pre-emptive measures to maintain domestic economic growth momentum in the face of a global economic recovery potentially restrained by the recent Covid-19 outbreak”. The viral outbreak is hampering activity in China and is set to have a knock-on effect on Indonesia’s economy through lower tourism inflows and exports, at least through Q1. In light of this, BI downgraded its 2020 growth projections to 5.0%–5.4%.

The Central Bank struck a dovish tone in its communiqué and suggested there was room for further rate cuts if required to support the economy. Most FocusEconomics panelists see some further loosening by end-2020.

According to Nicholas Mapa, senior economist at ING: “If the economic fallout from the coronavirus becomes more evident or the Fed is indeed pressured to continue its rate cutting cycle, we believe BI will be open to easing policy rates further to help support the economy in light of President Jokowi’s 5.3% growth aspiration.”

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