Indonesia: Bank Indonesia leaves rates unchanged in June, but signals possible loosening further ahead
June 20, 2019
At its 19-20 June monetary policy meeting, Bank Indonesia (BI) left the seven-day reverse repo rate at 6.00% for the seventh consecutive meeting, in line with market expectations. In addition, the Bank left the deposit facility rate and lending facility rate at 5.25% and 6.75%, respectively. However, the Bank lowered reserve requirements in order to stimulate domestic demand, and explicitly hinted at looser monetary policy going forward.
The Bank judged it would have been premature to begin cutting rates at the latest meeting. The Bank felt it required more time to examine the strength of the external sector, particularly given a still-sizeable current account deficit in the first quarter. Moreover, the Bank also highlighted the need to further observe financial market developments which could put downward pressure on the rupiah. The currency lost substantial ground in late April and early May amid escalating global trade tensions, highlighting just how quickly market sentiment can turn.
A rate cut is now definitely on the cards in the coming quarters, due to mild domestic price pressures, a more dovish U.S. Federal Reserve and as the Bank looks to support the economy against the backdrop of a global slowdown. However, the favorable evolution of the current account deficit and the rupiah will likely be key prerequisites for any loosening.
Indonesia Interest Rate Forecast
Our panelists have grown markedly more receptive to the idea of a rate cut in recent months. FocusEconomics Consensus Forecast panelists now expect the seven-day reverse repo rate to end 2019 at 5.70% and 2020 at 5.56%.
Author: Oliver Reynolds, Economist