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.