Indonesia makes year’s third rate cut

  • Economy
  • Friday, 19 Jun 2020

JAKARTA: Indonesia’s central bank has cut its benchmark rate for the third time this year and signalled it may ease further, as South-East Asia’s largest economy struggles to avoid a recession amid the broadening fallout of the coronavirus pandemic.

Bank Indonesia (BI) cut the seven-day reverse repurchase rate by 25 basis points to 4.25%, the lowest since 2018, and governor Perry Warjiyo said there was space for more cuts as long as the rupiah remained stable.

Yesterday’s cut was predicted by the majority of economists in a Reuters poll.

The move came a few days after the finance minister warned of recession risks, with gross domestic product expected to shrink by 3.1% in the second quarter – the first contraction since 1999 – and possibly contract again in the following three months.

BI trimmed its outlook for 2020 GDP growth to 0.9%-1.9% from 2.3% and pledged to keep all of BI’s instruments “accommodative”.

“With all of these factors: inflation low, the need to lift GDP growth, a small current account deficit, we say there is room for further rate cuts, ” Warjiyo told a virtual briefing.

“The timing would depend on global conditions and ensuring the stability of the rupiah is maintained, ” he said.

The rupiah strengthened after the announcement before settling little changed at 14,010 a dollar, while the main stock index fell 1.3% after the announcement.

Warjiyo said the currency was undervalued and could strengthen for the remainder of the year.

In total, BI has trimmed its key rate by 75 bps so far this year to stimulate economic activity, on top of four reductions amounting to 100 bps in 2019.

Capital Economics’ analyst Gareth Leather expects BI to continue with gradual easing over coming months due to “the very poor outlook for the economy”.

Bahana Sekuritas’ economist Satria Sambijantoro in Jakarta, who expects another 25 bps cut, said the pace of economic contraction in the second quarter may not be different to the double-digit falls seen in Singapore and Thailand.

“A response from the central bank, especially rate-cuts, would be necessary to maintain investors confidence that policymakers are ready to mitigate growth risks, ” he said.

Bank Danamon and ANZ also see a further 25-bp rate cut.

The government has budgeted nearly US$50bil to support the pandemic-hit economy, but had only doled out a small amount. — Reuters

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