Indonesia rate cuts seen in pipeline in wake of Jokowi victory

There is growing support for the view that policymakers now have ample room to mull easing in 2019

JAKARTA • With Indonesian President Joko Widodo making a renewed effort to boost economic growth as he prepares for a second term in office, the central bank may soon be able to play its part with interest-rate cuts.

Economists are bringing forward their calls for monetary policy easing after unofficial results from last week’s presidential election put Jokowi — as Widodo is popularly known — comfortably in the lead.

That allows for policy continuity and for Jokowi to push ahead with his ambitious infrastructure programme.

Bank Indonesia (BI) governor Perry Warjiyo has been sounding a cautious tone on the possibility of rate cuts, and only one of the 30 economists surveyed by Bloomberg yesterday sees a change.

Still, with inflation subdued and the currency stabilising after last year’s emerging-market rout, there is growing support for the view that policymakers now have ample room to consider easing later this year, and as early as this quarter.

“A Jokowi victory could lead to a resumption of inflows, adding to favourable local and global factors,” said Euben Paracuelles, an economist at Nomura Holdings Inc in Singapore.

“We think the scope for rate cuts this year by BI has increased.”

He predicts 50 basis points (bps) of easing in the fourth quarter (4Q) after previously forecasting rate cuts to begin next year.

The president is expected to be confirmed as having won a second five-year term when official results from the April 17 election are announced in the next few weeks.

He is leading by about 10 percentage points over Prabowo Subianto in official counting, with about 30% of votes from more than 800,000 polling stations tallied, mirroring unofficial results by private pollsters last week.

With the election out of the way, the government is now framing its next budget and is targeting a growth rate of as much as 5.6% next year.

While that would still be short of the 7% goal set by Jokowi ahead of his first term, it would be the fastest pace since 2013 and eclipse the 5.3% forecast this year.

Inflation has been trending down and reached an almost decade-low of 2.48% last month, below the central bank’s target band.

Consumer prices next year are seen in a range of 2% to 4% next year, the government said on Tuesday.

After raising interest rates six times last year to stabilise the currency amid a sell-off, Indonesia’s central bank has kept its key rate unchanged at 6%.

With the US Federal Reserve (Fed) putting further rate hikes on hold and the rupiah on more solid ground, BI has softened its hawkish rhetoric.

Although not ready to signal any easing, Warjiyo has been more upbeat, pointing to a narrowing current account deficit and portfolio inflows.

“It is true that various indicators show positive development,” Warjiyo told reporters on Tuesday.

But he reiterated the central bank’s monetary policy is anchored to ensure external stability of the economy, particularly to control the current account deficit, and to maintain attractiveness of domestic financial assets to investors.

Bank of America Merrill Lynch (BofAML) expects the central bank to cut interest rates as early as this quarter now that the elections are out of the way.

“We expect BI to stay on hold in the meeting immediately following the elections and commence a mini easing cycle of 75bps over June-August,” BofAML said in a note published on April 19.

Morgan Stanley also expects easing global financial conditions, as well as favourable domestic macro conditions to allow BI to unwind its earlier rate hikes.

The bank is predicting a 75 bp cut in the 3Q in view of a more dovish Fed, a weaker dollar, low domestic inflation and a narrowing current account deficit, Morgan Stanley economists said in a note on April 17.

The rupiah has gained about 2% against the dollar this year, while investors have pumped US$3.95 billion (RM16.35 billion) into government bonds since the start of January. — Bloomberg