BI seen starting easing cycle with rate cut tomorrow

JAKARTA: Indonesia’s central bank is likely to begin an easing cycle with a rate cut, ahead of an anticipated Federal Reserve reduction of US rates at the end of July, the majority of analysts in a Reuters poll said.

In 2018, Bank Indonesia (BI) hiked its key interest rate six times by 175 basis points to respond to the Fed’s four increases that had contributed to sending the rupiah to its lowest level since 1998.

Now, with the rupiah Asia’s second best-performing currency this year and the Fed on a sharply changed path taking account of slowing global growth, many think BI will ease policy before the Fed does.

In the poll, 23 of 33 analysts predicted BI will make a 25 basis point trim in the benchmark seven-day reverse repo rate to 5.75% – which would be the first cut since September 2017 – tomorrow. The other 10 expect BI to hold.

The poll showed an expectation of further policy easing until the first quarter of 2020. Among 19 analysts who made predictions of where the benchmark would be at end-March, the median view was 5.25%, or 75 basis points below the current rate.

“Coast is clear: We think the time has likely come for BI to embark on a rate-cutting cycle,” HSBC economist Joseph Incalcaterra said in a Monday note. He cited the Fed, the stronger rupiah and President Joko Widodo’s confirmed re-election as among reasons for BI to act this week.

Mohamed Faiz Nagutha, Bank of America Merrill Lynch economist, also expects a cut this week, but said BI might opt to wait for the Fed to cut, moving the start of an Indonesian easing cycle to August or September.

Last month, when BI trimmed a reserve requirement ratio, Governor Perry Warjiyo said it was a “matter of timing” before a benchmark reduction.

South-East Asia’s largest economy grew 5.07% in the first quarter, less than expected. BI has said growth was “flattening” in the second quarter and full-year expansion was on track to be below the midpoint of its 5%-5.4% forecast.

Reduced rates for Indonesian borrowers could help Widodo, who on Sunday pledged faster infrastructure development and investment in human capital in his second five-year term, which starts in October. -—Reuters