Advertisement

Bank Indonesia looking for right time to cut rates

Font Size

LOGO of Indonesia's central bank, Bank Indonesia, as seen in Jakarta, Indonesia -- REUTERS

INDONESIA’S central bank, one of the most aggressive interest rate hikers in Asia last year, is taking its time to lower rates.

Even with the US Federal Reserve signaling it may ease soon and peers including India, the Philippines and Malaysia already cutting, Bank Indonesia is worried about scaring off foreign investors if it moves too much or too fast. It needs foreign inflows to support the rupiah and to fund the current account deficit, two of the economy’s key vulnerabilities.

“If we cut the rate too quickly, external stability will be hit, especially if trade tensions remains like now. Also if we cut too deeply,” Onny Widjanarko, a spokesman for the central bank, said in Jakarta. “We are trying to maintain the attractiveness of our yield for investors.”

Governor Perry Warjiyo has said a rate cut is just a matter of timing and officials are watching the economic data closely. Consumer-price figures due on Monday should give more clues about how soon they could move, with economists in a Bloomberg survey forecasting inflation probably eased to 3.2% in June from a year ago.

Deputy Governor Dody Budi Waluyo said on June 28 the central bank is confident inflation will remain inside its 2.5% to 4.5% target range this year, coming in possibly below the midpoint.

So far, policy makers have taken targeted steps to encourage lending by reducing the reserve ratio for banks. The 50 basis-point cut in the ratio in June will probably add 25 trillion rupiah ($1.8 billion) of liquidity into the banking system and help loans grow by 10%-12% in 2019, according to the central bank.




The reserve ratio cut complements other “accommodative,” non-monetary measures to accelerate growth, said Juda Agung, Bank Indonesia’s executive director for macroprudential policy.

“Indonesia has not reached the level of credit growth it’s supposed to have,” he said. “We can still push for higher.”

Other regional central banks are also using the RRR tool to spur growth. In the Philippines, policy makers surprised most economists in June by keeping interest rates unchanged, while continuing to bring down the reserve ratio gradually.

PAST TURMOIL
Bank Indonesia left its benchmark rate on hold at 6% on June 20 citing market conditions and external stability concerns. It raised interest rates six times last year by a total of 175 basis points amid an emerging-market rout.

“Bank Indonesia is without doubt treading cautiously despite the recent improvement in market sentiment,” said Joseph Incalcaterra, an economist with HSBC Holdings Plc in Hong Kong. “The memory of last year’s volatility is fresh in the minds of central bankers.”

With a current account deficit that’s forecast to reach as much as 3% of gross domestic product this year, Indonesia is reliant on foreign inflows and vulnerable to market swings.

The economy has felt the brunt of market turmoil in the past, including during the Asia financial crisis more than two decades ago, the 2013 ‘taper tantrum’ and the 2018 sell-off in emerging markets.

Nomura Holdings Inc. expects Bank Indonesia, which last lowered borrowing costs in September 2017, to cut at the July 18 meeting, followed by more easing after that.

“It has clearly signaled an easing bias,” said Krystal Tan, an economist at Australia & New Zealand Banking Group Ltd. in Singapore. “In our view, rate cuts are just a matter of when, not if.”

After meeting officials in Jakarta, Goldman Sachs Inc. economists came away with the impression that the plan for monetary easing remains somewhat cautious, especially given the array of tools available.

How much wriggle room may depend on factors most likely outside Indonesia’s control.

“With the Federal Reserve now changing tone in terms of policy direction, it’s good for emerging economies including Indonesia,” Finance Minister Sri Mulyani Indrawati said in an interview last week. — Bloomberg

Advertisement