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BI cuts rate, takes pro-growth stance
Perry Warjiyo (Antara)Bank Indonesia (BI) has trimmed its policy rate while hinting at further cuts down the line in a bid to boost economic growth amid benign inflation and the country’s manageable external balance
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Perry Warjiyo (Antara)
Bank Indonesia (BI) has trimmed its policy rate while hinting at further cuts down the line in a bid to boost economic growth amid benign inflation and the country’s manageable external balance.
Following its two-day board of governors meeting, the central bank cut its benchmark rate, the seven-day reverse repo rate, by 25 basis points (bps) to 5.75 percent on Thursday, in line with analysts’ expectations. The central bank also slashed its lending and deposit facility rates by 25 bps each to 6.5 percent and 5 percent, respectively.
The move would not come as a surprise to 23 of the 33 analysts polled by Reuters, who had projected BI to bring down its interest rate this month. This is the first policy easing since the central bank hiked its benchmark rate in several steps by a total 175 bps last year in an effort to prevent capital outflows.
This means BI is jumping on the policy-easing bandwagon after central banks of numerous countries cut their interest rates amid cooling economic activity. Malaysia, for instance, slashed its benchmark rate in June for the first time since July 2016, together with Australia and the Philippines. India’s central bank has even trimmed its interest rate three times this year.
On Thursday, the central bank of South Korea cut its seven-day repurchase rate to 1.5 percent from 1.75 percent as economic growth softened. It now expects gross domestic product (GDP) to expand by 2.2 percent this year versus 2.5 percent projected in April, Bloomberg reported.
“The policy is consistent with low inflation expectations and the need to build economic growth momentum amid a backdrop of easing global financial market uncertainty and controlled external stability,” BI Governor Perry Warjiyo said during a press conference in Jakarta on Thursday.
The rate cut, he went on to say, indicated that the central bank’s policy direction was aimed at accelerating GDP growth, a purpose reflected in its press release titled “Maintained Stability, Driving Growth Momentum”.
He explicitly said the central bank still had room for a looser policy in the future.
“Our monetary policy will be accommodative going forward,” said Perry. “The accommodative monetary policy means we could further ease [banking] liquidity or it could also mean to bring down the interest rate.”
Indonesia’s GDP expanded by 5.07 percent in the first quarter, according to Statistics Indonesia (BPS), a far cry from the government’s full-year target of 5.3 percent stipulated in the 2019 state budget.
BI noted a general softening of national economic growth during the second quarter of the year as a result of declining exports amid escalating global trade tensions. The frictions had restrained global demand and lowered commodity prices, which eventually undermined Indonesia’s export performance, it said.
Despite the challenges, BI has maintained its growth projection of 5 percent to 5.4 percent this year.
BI’s latest easing move was expected to mark the beginning of an easing cycle, Bahana Sekuritas economist Satria Sambijantoro said. He argued that the central bank had ample room to cut rates even up to four times until year-end.
“Our 100-bps rate-cut forecast this year is nothing but conservative, as it is only a partial unwind from the 175-bps rate hikes undertaken by BI last year,” he wrote in a research note.
Satria said BI’s easing cycle would complement the government’s strong pro-growth agenda going forward, as highlighted by various tax cuts prepared by the authorities to accelerate economic activity.
Separately, Center of Reform on Economics (CORE) Indonesia research director Piter Abdullah said the rate cut complemented the central bank’s macroprudential easing last month by lowering the average reserve requirement (GWM), which was expected to free up Rp 26.3 trillion (US$3.67 quadrillion) in the banking system.
He expressed confidence that the impact of such policies would be swiftly transmitted to higher loan and investment growth and eventually would accelerate GDP expansion.
