Bank Indonesia (BI) is expected to remain accommodative this year as the central bank signals it will further cut its interest rate and roll out other easing policies to fuel economic growth amid easing global uncertainty.

Privately owned DBS Bank Indonesia economist Masyita Cristallin said BI’s easing cycle was nearing its end with GDP growth remaining above 5 percent.

“There is room for another 50 basis point [bps] cut but BI will use it cautiously,” Masyita wrote in presentation material made available to The Jakarta Post on Wednesday.

She expected that BI would lower its benchmark interest rate in the first half of 2020 before inflation started accelerating and the current account deficit widened in the second half of the year. However, the lower rate transmission to boost growth could be hindered by the limitation of the interest-rate channel to support credit growth.

BI cut its benchmark rate, the seven-day reverse repo rate, by a total of 100 bps last year to help stoke the country’s sluggish economic growth. However, despite the steep decline, loan growth stood at the lowest level since 2009, at just 6.08 percent last year.

Indonesia’s GDP growth was also stuck at 5.02 percent in the third quarter, constituting the slowest expansion in more than two years.

Bank Central Asia (BCA) economist David Sumual also projected that the central bank would likely trim its policy rate by up to 50 bps in 2020.

“It will first look at how the easing cycle impacts the country’s economy and credit growth before deciding on any further interest rate cuts,” David told the Post, adding that the central bank would stay alert to several global risks including further easing by the United States Federal Reserve.

He was of the view that the current easing cycle had yet to impact loan growth, expecting that the impact would start to be seen in March this year.

“The weak demand for credit from private companies has resulted in sluggish loan growth, despite banks having made it easier for them to borrow money,” he said. “We will see in the first quarter how it will play out.”

Bank Danamon economist Dian Ayu Yustina projected the central bank would lower the benchmark rate only slightly amid a more balanced global risk and the continuing structural reform carried out by the government that should be positive for this year’s economy.

“Given the optimistic view, the outlook for further easing may depend on economic development, though we still see that BI has room for another 25 bps rate cut this year,” she wrote in a research note.

BI on Thursday held its rate at 5 percent and hinted at further easing going forward to anchor inflation, maintain financial market stability and support economic growth. It also maintained the deposit facility rate at 4.25
percent and lending facility rate at 5.75 percent.

Inflation stood at a record-low level of 2.72 percent last year, still within the central bank’s target of between 2.5 and 4.5 percent, as the government-controlled administered prices plunged.

“There is room to cut interest rates further but it is not the only tool we have,” BI Governor Perry Warjiyo told reporters in Jakarta on Thursday following BI’s two-day board of governors meeting. “We could also use liquidity injection and monetary operations to spur growth.”

In November last year, BI decided to lower the average primary reserve requirement (GWM) by 50 bps to between 4 and 5.5 percent starting Jan. 2 in an effort to provide more liquidity for banks. The GWM is the minimum amount of bank liquidity that must be stored at the central bank.

BI’s decision on Thursday was taken against the backdrop of an improved global situation following a phase one trade deal between the US and China as well as better economic growth prospects for several developing countries such as India and Brazil.

BI also noted an improvement in the country’s economy driven by an increase in commodities exports such as coal and vehicles as well as stable household spending.

Indonesia booked an improved trade deficit at US$3.2 billion last year from $8.6 billion in 2018, amid a decrease in exports and imports due to trade frictions that slowed global economic activity.

“The economic cycle has passed its lowest point and will continue to improve,” said Perry, adding that the government’s omnibus bill on job creation would help boost investments coming into the country.

The central bank projected economic growth would reach 5.1 percent in 2019 and further increase to between 5.1 and 5.5 percent this year. Meanwhile, loan growth was projected to reach 10 to 12 percent by year-end.