Bank Indonesia October 24, 2019 / 08:13 am UTC

Bank Indonesia’s Pre-Emptive Policy May Be Nearing an End

By Charu Chanana

Bank Indonesia (BI) delivered a fourth consecutive cut at its October 24 meeting. The central bank’s aggressiveness on rate cuts will likely be on course to ease now, and further rate cuts will be data dependent. An accommodative policy mix, however, along with political stability, will drive improvements in growth in Q4 and 2020. 

Bank Indonesia (BI) announced another 25bps cut in its policy rate at the October meeting, bringing the 7-day reverse repo rate to 5%, in an additional pre-emptive step to support growth amid global headwinds. BI also said it will seek room for further easing signaling more rate cuts are still in order. However, concerns about transmission of the 100bps of rate cuts announced so far in the current cycle still persist.

All economic forecasts were maintained, with 2019 GDP growth seen below the midpoint of 5-5.4% and 2020 GDP growth at the midpoint of 5.1-5.5%. Inflation also remains manageable, and Q3 current account deficit is seen under control. However, the Q4 outlook is stable compared to the expected weakness in Q3 as per the central bank’s survey results. This improvement in activity is possibly underpinned by political stability following President Joko Widodo’s re-election. Further improvement in growth is likely in 2020 given credit demand will likely recover. 

We believe the Fed tone as well as progress on the U.S.-China trade deal will remain key inputs for BI on magnitude and timing of further easing. We believe more rate cuts are still in order, especially as fiscal support is likely to remain restrained. However, some caution is warranted and the pace of rate cuts is likely to slow down from here, remaining mostly dependent on data. We still expect the terminal policy rate to be at 4.5%. Other policy tools such as macroprudential measures will continue to be accommodative. 

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Analyst Certification
I, Charu Chanana, the lead analyst certify that the views expressed herein are mine and are clear, fair and not misleading at the time of publication. They have not been influenced by any relationship, either a personal relationship of mine or a relationship of the firm, to any entity described or referred to herein nor to any client of Continuum Economics nor has any inducement been received in relation to those views. I further certify that in the preparation and publication of this report I have at all times followed all relevant Continuum Economics compliance protocols including those reasonably seeking to prevent the receipt or misuse of material non-public information.