B

ank Indonesia (BI) has hinted that it would be possible to cut its rate as global and domestic economic challenges have started to recede, BI officials said.

The central bank decided at its October meeting to hold the benchmark rate at 7.5 percent as well as deposit facility and lending facility rates at 5.5 percent and 8 percent, respectively.

BI spokesperson Tirta Segara said the US Federal Reserve (Fed) had displayed its '€œdovish'€ stance during its September meeting, indicating that it would further delay its plan to hike its fund rate as it did not see a solid improvement in the US economy.

According to Tirta, domestic macroeconomic indicators, especially the inflation rate and exchange rate, were currently in a better condition, even though it would remain cautious with global uncertainties as China'€™s economic growth was still slow.

'€œNext year, there will be a space for monetary policy relaxation, but BI will remain cautious as there remains uncertainty,'€ Tirta said at a press conference on Thursday evening.

Tirta said the central bank had seen an improvement in the rupiah as well as the country'€™s economy as the government had started to accelerate its spending and introduced the fourth round of its economic stimulus packages.

'€œThe inflation rate will be under 4 percent and current account deficit under the previous prediction of 2 percent,'€ Tirta added.

BI'€™s executive director for economy and monetary policy Juda Agung said the improvement in the domestic economy as well as the Fed'€™s dovish stance had positively affected capital inflows entering the country.

Between Oct 1 and 12, Juda said Indonesia received net inflows worth US$249 million, comprising $174 million in stocks and $75
million in government bonds, which positively impacted domestic foreign exchange supply and demand.

'€œIt is possible that BI rate will decline, but we will always evaluate that possibility at our monthly board of governors'€™ meeting,'€ Juda said.

Tony Prasetiantono, economist at Gadjah Mada University, said BI'€™s decision to hold its rate was correct as it should maintain the momentum of recent rupiah appreciation and avoid distortion.

According to Tony, the central bank could start to cut the rate gradually after the rupiah appreciation remained at an optimum level and showed a stable condition.

'€œDespite the upcoming rise of the Fed fund rate, I think BI will be '€˜brave'€™ enough to cut its rate because of the low inflation rate of 4 percent,'€ Tony told The Jakarta Post.

Tony was convinced that the rupiah would continue its strengthening trend as global investors continued to see China, India and Indonesia '€” the top-three emerging markets '€” as the main destination for their capital.

'€œThere are no other countries that are more interesting, not even Vietnam and the Philippines as they have small gross domestic product [GDP] and are not involved in G20, even though they have high growth,'€ Tony said.

Gareth Leather, Asia economist at global macroeconomics research company Capital Economics, said in his research note that the central bank'€™s rate cut would occur before the end of this year if the rebound of the rupiah did not go into reverse.

'€œFurther loosening is likely in early 2016 too. But with the prospect of Fed tightening likely to come back on the radar, BI will be wary of cutting interest rates too quickly,'€ Leather said.
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