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Jakarta Post

After deflation, BI has room to cut key rate, say economists

After deflation, BI has room to cut key rate, say economists High-ranking brief: Bank Indonesia (BI) Governor Agus Martowardojo (center), accompanied by director for monetary policy Solikin M. Juhro (left) and communications department executive director Tirta Segara (right), explains the country’s economic situation during his visit to The Jakarta Post office in Jakarta on Monday. Agus emphasized the central bank’s stance in prioritizing “stability over growth” amidst persistent global economic risks, in contrast to some economists’ beliefs that BI has room to cut interest rates to spur growth.(JP/Jerry Adiguna) (BI) Governor Agus Martowardojo (center), accompanied by director for monetary policy Solikin M. Juhro (left) and communications department executive director Tirta Segara (right), explains the country’s economic situation during his visit to The Jakarta Post office in Jakarta on Monday. Agus emphasized the central bank’s stance in prioritizing “stability over growth” amidst persistent global economic risks, in contrast to some economists’ beliefs that BI has room to cut interest rates to spur growth.(JP/Jerry Adiguna)
Tassia Sipahutar
Jakarta   ●   Tue, November 10, 2015

High-ranking brief: Bank Indonesia (BI) Governor Agus Martowardojo (center), accompanied by director for monetary policy Solikin M. Juhro (left) and communications department executive director Tirta Segara (right), explains the country'€™s economic situation during his visit to The Jakarta Post office in Jakarta on Monday. Agus emphasized the central bank'€™s stance in prioritizing '€œstability over growth'€ amidst persistent global economic risks, in contrast to some economists'€™ beliefs that BI has room to cut interest rates to spur growth.(JP/Jerry Adiguna)

With the easing of the inflation pressures, economists say that there is a window for Bank Indonesia (BI) to lower its key rates.

In a new Asia Economics Monthly report, Deutsche Bank chief economist Taimur Baig said that the central bank could cut its rates as early as next year.

'€œWe think BI will cut rates by at least 50 bps [basis points] in the first half of 2016,'€ he wrote in a report.

'€œA favorable base effect will push down inflation toward 4 percent by December, as per our forecast,
and we think it will hover in the 4 to 5 percent range next year, with both food and prices likely to be stable, reflecting muted demand,'€ he said.

According to the latest data from the Central Statistics Agency (BPS), Indonesia posted deflation in two consecutive months, with 0.08 percent in October and 0.05 percent in September. It brought the year-to-date (ytd) inflation rate to 2.16 percent and year-to-year (yoy) figure to 6.25 percent. The ytd rate, as reported before, is within the target range of the 3 to 5 percent set by BI.

This, according to Deutsche Bank, ought to pave the way for a policy of interest rate cuts next year. With a 50 bps cut predicted, BI'€™s benchmark rate is expected to fall to 7 percent, its lowest level since September 2013.

Despite the deflation, the BI governor said Monday that it would still be risky for the central bank to lower interest rates as a possible increase in the US rates early next year could prompt capital outflows from Indonesia.

BI has maintained its rates at 7.5 percent since February, a move that it deems crucial to keep up with inflation, help stabilize the exchange rate and bring down the current-account deficit.

Baig said that the authorities would probably have cut rates this year, had it not been for the fact the rupiah'€™s sharp depreciation closed that window.

In the report, he lauded the authorities'€™ measures to support the currency, including by improving the incentives to keep dollars on shore, enhancing foreign currency liquidity in the forward markets and enforcing hedging requirements.

HSBC ASEAN economist Su Sian Lim and economics associate Abanti Bhaumik said that BI had some room to complement the government'€™s expansionary fiscal moves with monetary easing of its own, in order to partially counter current economic slowdown.

'€œIn terms of timing, our base case remains at 1Q16 [first quarter of 2016] after the US Federal Reserve hikes in December. That said, should the rupiah prove to be relatively stable over the next few weeks, a rate cut either at the Nov. 17 or Dec. 17 meetings cannot be completely ruled out,'€ Lim and Bhaumik said in an email.

Meanwhile, Bank Danamon economist Dian Ayu Yustina said that BI would have room to lower the BI rate this year by 25 bps as the inflation pressure was relatively low.

'€œWe may see the inflation fall to around 5 percent in November because of the high base effect [the fuel price hike of Nov. 2014] and it will fall further in December to around 3.5 percent,'€ she wrote in a research note, following the latest inflation rate announcement.

However, she acknowledged that the decision would also be influenced by the stability of the rupiah, especially as the Fed'€™s plans remained unclear.

Bank Mandiri economist Andry Asmoro said that room for monetary easing was now wide open, considering that inflation had reached a low level.

'€œBI expects to see low inflation as well next year. So, if we use inflation targeting as a framework, the room is very wide,'€ he said.

The central bank sets the same target range for inflation, at 4 percent, plus or minus 1 percent.
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