BI’s rate cut shows comfort with rupiah outlook

JAKARTA • Indonesia’s central bank surprised most economists on Tuesday by lowering interest rates, reflecting its relative comfort with the currency and inflation outlook.

The benchmark rate was cut by a quarter point to 4.5%, with all but six of the 28 economists surveyed by Bloomberg predicting it would stay on hold. Bank Indonesia (BI) reduced borrowing costs six times last year, making it Asia’s biggest rate cutter.

Governor Agus Martowardojo and his board had put po- licy easing on hold until now, concerned that tightening US monetary policy may spur outflows from emerging markets and undermine the currency. With the US Federal Reserve sticking to gradual rate hikes in the face of subdued inflation, the rupiah has been relatively stable this year, gaining about 1% against the dollar.

“The central bank probably thinks the financial system is now stronger and the impact of federal fund rate hikes would be marginal or could be managed by improving fundamental conditions in the Indonesian economy,” said Josua Pardede, an economist at PT Bank Permata Tbk in Jakarta.

BI said the move was motivated by an improving inflation outlook and expectations of only one more US rate increase, delayed to later this year. Officials also cited the rupiah and current-account deficit remai- ning “manageable”.

Six rate cuts last year in Indonesia had failed to spur economic growth above 5%, while credit demand is still lacklustre, enabling the central bank to restart its easing cycle.

BI may follow through with more easing. Weiwen Ng, an economist at Australia & New Zealand Banking Group Ltd, said the bank may cut once more, while ING Groep NV’s Prakash Sakpal is forecasting
a 25 basis-point reduction by the end of 2017 and two more cuts in 2018.

The Jakarta Composite Index, the nation’s benchmark stock index, rallied 0.6% to a record at close yesterday, ta- king its gain this year to almost 12%. The rupiah retreated 0.1% to 13,359 per dollar as of 4:27pm in Jakarta yesterday.

Other key points from BI’s statement: Inflation forecast to average about 4% this year and below 3.5% in 2018. Forecast for loan growth for this year lowered to 8%-10% from 10%-12% previously. Gross domestic product growth is estimated to be 5.1% to 5.5% in 2018. President Joko Widodo set a growth goal of 7% when he came to office three years ago. — Bloomberg