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BI lowers rate but 'cautious' on more easing
Bank Indonesia (BI) lowered interest rates for the first time in three years as the hawkish central bank surprisingly shifted its policy gear to support the growth-minded economic agenda envisioned by President Joko âJokowiâ Widodo
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Bank Indonesia (BI) lowered interest rates for the first time in three years as the hawkish central bank surprisingly shifted its policy gear to support the growth-minded economic agenda envisioned by President Joko 'Jokowi' Widodo.
The central bank's six-member board of governors decided on Tuesday to lower the benchmark BI rate by 25 basis points to 7.5 percent, the first cut in the two-year leadership of governor Agus Martowardojo, a former banker who is seen as having a hawkish economic mind-set.
BI also cut the overnight deposit facility (Fasbi) rate, which influences interbank rates in the local financial market, by 25 basis points to 5.5 percent. However, it kept the lending facility (Repo) rate for local banks at 8 percent.
Inflation rates this year would fall in the 'lower bias' of BI's 3 to 5 percent range, Agus said during the press briefing. The move to lower the benchmark rate was also driven by the uneven global economic recovery that put pressure on Indonesia's exports, the BI governor added.
Nevertheless, a central bank executive signaled that the rate cut might not be followed by an even more aggressive loosening cycle.
'Bank Indonesia has lowered the interest rates, but we would remain cautious,' senior deputy governor Mirza Adityaswara explained to reporters, when asked on BI's monetary policy stance going forward.
Mirza said that BI would stay vigilant on the possible interest rate hike in the US, which could still pose capital outflow risk to emerging economies including Indonesia.
The cut in the benchmark BI rate was a much-awaited move, especially among many government officials and local businesspeople already complaining about tight liquidity conditions that have put pressure on economic growth.
Jokowi, who was elected as President in October, inherited an economy that grew only 5 percent throughout last year, the slowest pace since 2009, when Indonesia felt the pinch of the global financial crisis.
Economists have said that the move should be positive for economic growth, but negative for the rupiah, as lower interest rates would lessen the return of local financial assets, thus triggering outflows that could weaken the Indonesian currency.
'However, given the recent improvement in the trade balance, likely another low inflation point by the end of this month, and the fact that the real policy rate would still be positive, the sell-off [of rupiah assets] should be manageable,' Credit Suisse economist Santitarn Sathiratai said in an email interview.
While the looser monetary policy is predicted to weaken the rupiah, the reaction in the currency market so far has been muted. The rupiah's one-month non-deliverable forwards, a future benchmark for the currency, were steady at 12,861 per dollar as of 6.33 p.m. in Jakarta, after falling by 0.2 percent after the rate cut was announced.
The rupiah has fallen almost 3 percent this year, the worst performer in Asia among 11 widely traded currencies tracked by Bloomberg. The current account deficit is about 3 percent of gross domestic product.
'Market perception should be well-maintained, as the attention now will shift to the growth prospects,' Bank Danamon economist Dian Ayu Yustina wrote in a research report. 'We see large inflows on the government bonds as the growth prospects improve, thanks to the government's efforts in pursuing economic reform policies,' she noted.
