Indonesia central bank cuts bank reserve requirements, says next rate move is down


  • Business
  • Thursday, 20 Jun 2019

Indonesia


JAKARTA: Indonesia's central bank held its policy interest rate unchanged on Thursday, but moved to cut the reserve requirement for banks and said it was now appeared a "matter of timing and magnitude" before it made its first cut in rates since September of 2017.

Bank Indonesia (BI) left its seven-day reverse repurchase rate at 6.00%, in line with the expectations of 19 out of 22 analysts surveyed by Reuters.

Governor Perry Warjiyo said BI would from July lower the reserve requirement for banks by 50 basis points to boost liquidity. The decision came hours after the Federal Reserve said it was ready to battle growing global and domestic economic risks with interest rate cuts beginning as early as next month.

The Bank of Japan later joined the Fed in signalling readiness to ramp up stimulus.

Dovish signals coming from the world's major central banks, along with rate cuts in other emerging market economies heightened expectations that Indonesia will join a global switch to an easier monetary policy.

Southeast Asia's biggest economy missed market forecasts for its economic growth in the first quarter due to cooling investment, boosting the case for a rate cut to begin unwinding last year's tightening.

Central banks in India, Malaysia and the Philippines have all cut rates this year to boost growth. But like Indonesia, the Philippine held its benchmark rate steady on Thursday while also saying there was room to ease.

Bank Indonesia's Warjiyo said: "we have conveyed that we are monitoring two things - global financial market conditions and balance of payments - in considering rate cuts."

"So cutting rates is an action that we will take in the future. It is a matter of time and magnitude," he told BI's monthly policy meeting, adding the main issue currently impacting global markets was the U.S.-China trade war.

Taiwan's central bank also kept policy rate unchanged, but lowered its 2019 GDP growth outlook amid worries the trade war will hurt its economy.

Indonesia's rupiah currency edged up a fraction after the rate announcement, while the main stock index briefly firmed before ending the day 0.1% down from previous closing.

Last year, between May and November, BI raised the benchmark six times by a total of 175 basis points to support the rupiah in the wake of U.S. rate hikes by the Fed.

BI's baseline scenario expects the Fed to make no rate moves this year, Warjiyo said, but he sees a possibility of up to 75 bps cut in U.S. interest rates through 2020 depending on how big the impact of the trade war is on the U.S. economy.

LIQUIDITY INJECTION

Warjiyo said economic growth was currently on track to be below the midpoint of its 5.0%-5.4% outlook.

He said efforts were needed to support domestic consumption, noting the cut in reserve requirements would give the banking system 25 trillion rupiah ($1.8 billion) of liquidity that they could use to lend to customers.

Andry Asmoro, chief economist Bank Mandiri, said there now appeared to be room for BI to cut its benchmark by 25 bps in the third quarter, "sooner than our previous expectation, which was in Q419."

He said this would hinge on relatively low and stable inflation, an improving domestic investment climate, a shrinking current account deficit and a stable rupiah.

The annual inflation rate accelerated in May to 3.32% on the back of Ramadan festivities spending, but was still comfortably within BI's 2.5%-4.5% target range.

Warjiyo said BI still sees the current account deficit in a range of 2.5%-3% of GDP in 2019, smaller than 2018's 3% gap.

The current account deficit is a source of vulnerability for Indonesia because it relies on portfolio investment to fund it. - Reuters

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