Indonesia’s central bank may cut key rate as virus hits economy — Reuters poll

ANALYSTS expect Bank Indonesia to cut its key rate. — REUTERS

JAKARTA — A slim majority of analysts polled by Reuters expect Indonesia’s central bank to resume its easing cycle at its policy meeting this week to provide a cushion for the expected economic impact from the coronavirus outbreak.

Sixteen of 28 economists in the survey expected Bank Indonesia (BI) to cut the benchmark 7-day reverse repurchase rate by 25 basis points (bps) to 4.75% at a two-day policy meeting that ends on Thursday. The other 12 predict BI will hold the rate at 5%.

A cut this week will be the fifth since BI began a monetary loosening cycle in May. BI’s total of 100-bp rate reduction and lending rules relaxation in 2019 were intended to support Southeast Asia’s largest economy amid a global economic slowdown.

Despite the impact of the coronavirus outbreak, Deputy Governor Dody Budi Waluyo said in early February that BI remained confident that economic growth would rebound this year after slipping to 5.02% in 2019, the slowest in three years.

But some independent economists and ministers have begun to flag downward risks to 2020 growth from the epidemic, as China is Indonesia’s largest trade partner, and a major source of investment and foreign tourists.

The COVID-19 virus has killed more than 1,800 people in mainland China.

“There is a serious risk that disruption in China’s manufacturing activities would affect global supply chains, affecting growth in regional economies, including Indonesia,” said Satria Sambijantoro, economist with Bahana Sekuritas in Jakarta.

“The upcoming slowdown would need preemptive fiscal and monetary policy responses,” said Sambijantoro, one of the economists who predicted BI would cut rates.

Chief Economics Minister Airlangga Hartarto forecast an up to 0.3-percentage point reduction in Indonesia’s gross domestic product growth this year if China’s growth lost between one to two percentage points.

The government has pledged to boost spending and provide incentives for the tourism sector to bolster economic activity.

Advocates for leaving rates unchanged believe uncertainties caused by the COVID-19 were a reason not to cut rates.

Rahul Bajoria, Barclays’ economist, said BI will be “reluctant to ease monetary policy further when global financial markets are cautious over the coronavirus outbreak in the region.”

Indonesia suffered bouts of capital outflows linked to fears of the outbreak’s impact on global growth earlier this month, prompting the central bank to intervene in the currency and bond markets.

BI had in the past been wary of cutting rates when the rupiah is weak. But despite the outflows, the rupiah is still up around 1.7% against the dollar so far this year, putting it among the best performing emerging Asian currencies. — Reuters