Bank Indonesia Cuts Rate for Second Month as Growth Sputters

Bank Indonesia lowered its key interest rate for a second straight month to bolster economic growth, and signaled further easing will depend on inflation and how the recovery from the coronavirus pandemic unfolds.

The central bank cut its seven-day reverse repurchase rate by 25 basis points to 4%, the lowest since the current rate system was adopted in 2016, as predicted by 18 of 30 economists surveyed by Bloomberg. One expected a 50 basis-point cut, while 11 forecast the bank to hold rates steady.

Bank Indonesia has been one of the more aggressive central banks in Asia, cutting rates four times this year and pledging to buy billions of dollars of government bonds to help finance the budget deficit. The central bank expects the economy to grow just 0.9%-1.9% this year, and inflation has slumped to a two-decade low as the pandemic crippled businesses and rendered millions of people jobless.

“This decision is consistent with inflation forecasts that remain low, maintained external stability and as a further step to encourage economic recovery in the Covid-19 pandemic,” Governor Perry Warjiyo said in his briefing. “Bank Indonesia, through its policy mix, will continue to strengthen synergies with the government and related authorities so that various policies pursued will be more effective in encouraging economic recovery.”

The rupiah weakened as much as 0.7% before paring losses to end at 14,625 to the dollar, its weakest closing level since May 28, according to data compiled by Bloomberg. The Jakarta Composite Index rose 0.4% to close at 5,098.374, while the yield on benchmark 10-year government bonds fell 4 basis points to 7.033%.

The rate cut may weigh on the rupiah, which has rebounded about 12% against the dollar since hitting a 22-year low in March, but has been the worst performer in Asia over the past month. Warjiyo said Thursday the currency has been pressured by global uncertainty, is undervalued and has room to appreciate.

“The clear implication of today‘s cut is that BI remains focused on growth rather than currency risks,” said Joseph Incalcaterra, HSBC’s chief Asean economist in Hong Kong. “We believe a more cautious and gradual pace of rate cuts in the coming quarters can help assuage concerns about currency risks” stemming from the banks quantitative easing program.

A spurt in coronavirus cases across the archipelago has clouded the timeline for resuming normal economic activity and weighed on household consumption, which makes up almost 60% of Indonesias economy.

“The governors statement notes various downside risks to global growth, including how virus resurgence threatens to limit how much various stimulus measures, by both developed and emerging markets, can do to help rejuvenate growth,” said Wellian Wiranto, an economist at Oversea-Chinese Banking Corp. in Singapore. “On the domestic front, even though he tries to strike a positive tone by noting the uptick in economic activity, the relative pessimism is clear.”

Currency Concerns

Warjiyo said further rate cuts will depend on inflationary pressures, but noted that buying bonds and ensuring liquidity can be more effective in reviving the economy.

The central bank has said the outlook for the current-account deficit, a perennial weakness for Indonesias economy, is improving, with the country posting a trade surplus of more than $5 billion in the first half of the year and foreign investors being net buyers of government bonds in the past three months. The current-account deficit for the year is expected to be around 1.5% of gross domestic product, Warjiyo said.

Other key points from Warjiyos briefing:

• Indonesias economy contracted in the second quarter, but began picking up again from June

• The pace of recovery in the third quarter will depend on how quickly the government can disburse stimulus and the banking system can restructure debts

• The bank maintained its inflation forecast for the year at 2%-4%, and sees the same range in 2021

— With assistance by Chester Yung, Eko Listiyorini, Tassia Sipahutar, and Tomoko Sato

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