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Jakarta Post

BI likely to maintain pro-growth policy amid easing external pressure

  • Marchio Irfan Gorbiano

    The Jakarta Post

Jakarta   /   Tue, January 14, 2020   /   11:56 am
BI likely to maintain pro-growth policy amid easing external pressure Fashioning fashion: Workers operate sewing machines at a garment factory in Bogor, West Java, in this file photo. Bank Indonesia is expected to further lower its interest rate to perk up the country's economy. (Antara/Yulius Satria Wijaya)

Bank Indonesia (BI) is expected to continue with its dovish monetary policy this year to encourage Gross Domestic Product (GDP) growth amid low inflation and easing external pressures, economists have said.

Center of Reform on Economics (CORE) Indonesia research director Piter Abdullah said BI may further lower its benchmark interest rate by up to 75 basis points (bps) to 4.25 percent as the more stable rupiah and low interest rate give the central bank enough space to continue its easing monetary cycle this year. 

“BI’s spirit to help [boost] economic growth was seen in 2019, and I think it will be continued in 2020,” said Piter. “In 2020, the opportunity for BI to cut rates is wide open.”

The central bank cut its rates four times last year to bring down its interest rate – the seven-day reverse repo rate – to 5 percent, citing anchored inflation within its target range and pre-emptive measures to boost domestic growth amid a global growth slowdown.

The easing of external pressures from the United States Federal Reserve, which according to its latest dot plot is expected to hold its policy rates throughout 2020, and dovish monetary policy stances from the central banks of other developed economies as a stimulus measure to counter a global growth slowdown will benefit emerging countries like Indonesia, Piter added.

As a result, more foreign capital is expected to enter the country and help the rupiah’s exchange rate remain stable. The rupiah will likely further strengthen to between Rp 13,900 and Rp 14,100, said Piter.

In a recently-released research note, Fitch Solutions Macro Research – a unit of Fitch Group – projected BI would take a 50 bps total rate cut this year to stoke growth amid indications of a domestic demand slowdown.

“Looking ahead, we forecast BI will undertake two 25-bps rate cuts over the course of 2020 in order to support economic activity and credit growth,” Fitch Solutions wrote in a research note. “The continued weakness in domestic demand is likely to motivate further rate cuts in 2020. We expect growth to average 5.1 percent in 2019 as a whole and then to pick-up to 5.2 percent in 2020.”

Indonesia’s GDP growth slowed down to 5.02 percent in the third quarter of 2019, lower than the 5.17 percent growth booked over the same period in 2018, as household spending showed no significant increase and investment grew sluggishly.

Lending growth also slowed to 6.53 percent year-on-year (yoy) in October last year, well below the central bank’s growth target of between 8 and 10 percent in 2019, amid sluggish loan demand from corporations, according to BI data.

BI governor Perry Warjiyo recently said that the central bank would maintain its accommodative policy stance in 2020 to stimulate growth.

““With low inflation and a stable exchange rate, all our policy instruments will be directed toward stimulating economic growth. We will maintain these accommodative policies in 2020,” he said during the 2019 Bank Indonesia Annual Meeting (PTBI) held in Jakarta on Nov. 28.

Bahana Sekuritas economist Satria Sambijantoro, however, was of a different view, saying that the central bank would likely to rely on non-interest-rate policies to stimulate growth considering the need to maintain a healthy interest rate differential with the Fed amid expectations that the latter would maintain its current policy rates.

“The room for BI to further cut its rates will actually be smaller [in 2020] because the Fed will likely maintain [its policy rates] and this creates the need to maintain a healthy yield differential,” said Satria.

However, he did not rule out that BI could slash its rates this year, saying that such a move would be “a secondary weapon” to stimulate GDP. Satria emphasized that BI could focus more on tweaking its macroprudential policy to accelerate its monetary policy transmissions to the banking industry.