Money in Indonesia

Indonesia - Money

Bank Indonesia cuts rates in July to boost the economy

At its 17–18 July monetary policy meeting, Bank Indonesia (BI) lowered the seven-day reverse repo rate from 6.00% to 5.75%, as the majority of market analysts had expected. The Bank also cut the deposit facility and lending facility rates by 25 basis points each, to 5.00% and 6.50% respectively.

The Bank judged it necessary to provide extra monetary stimulus in order to support the economy, against a backdrop of global trade tensions which, according to BI, “continue to pressure world trade volume and undermine global economic growth”. On the price front, inflation is well within the 2.5%–4.5% target range despite an uptick in recent months. Moreover, the rupiah has appreciated notably since the Bank’s June meeting, dipping below IDR 14,000 per USD in mid-July. The combination of under-control inflation and a stronger currency provided the necessary leeway to cut rates, even before expected monetary loosening by the U.S. Federal Reserve.

In its communiqué, BI stated it “perceives adequate space for accommodative monetary policy” moving forward, hinting at potential further rate cuts. Several panelists share this view, with some seeing up to 50 basis points of further cuts by year-end.

Commenting on the prospects of further easing, Nicholas Mapa, an economist at ING, noted:

“The decision for further easing would likely rest on the stability of the currency with Governor Warjiyo clearly highlighting its importance in providing financial market stability. However, it does appear that Governor Warjiyo is very open to easing further”.

FocusEconomics Consensus Forecast panelists currently expect the seven-day reverse repo rate to end 2019 at 5.67% and 2020 at 5.53%. These forecasts are likely to be revised down in light of the Bank’s recent move in the upcoming Consensus Forecast, to be published on 20 August.