Bank Indonesia Slashes Interest Rates for 3rd Month

Bank Indonesia reduced its 7-day reverse repo rate by 25bps to 5.25 percent during its September meeting, in an attempt to boost economic growth amid low inflation expectations. It was the third straight cut in three months, amid growing concerns about global growth due to continued trade tensions and a number of geopolitical risks. The overnight deposit and lending facilities were also trimmed by the same amount to 4.50 percent and 6.00 percent, respectively.

Excerpts from the Bank Indonesia press release:

Ongoing trade tensions between the United States and China, accompanied by geopolitical risks, continue to suppress the global economy and amplify global financial market uncertainty. The tit-for-tat imposition of higher import tariffs by the United States and China is stifling world trade volume and global economic growth. The US economy is moderating on declining exports and non-residential investment. In addition, economic growth in Europe, Japan, China and India continues to decelerate on weaker exports, which has fed through to lower domestic demand. The global economic slowdown has triggered lower international commodity prices, including oil, leading to mild inflationary pressures. In response, many countries have introduced fiscal stimuli and relaxed monetary policy. Meanwhile, high global financial market uncertainty has triggered a shift in global funds to safe haven assets, such as government bonds in the United States and Japan as well as gold, although capital inflows to developing economies have been maintained. Prevailing global economic dynamics demand vigilance due to the potential impact on efforts to stimulate economic growth and maintain foreign capital inflows to bolster external stability.

Indonesia's economy remains overshadowed by intense global headwinds. Exports have failed to regain momentum in line with weaker global demand and sliding commodity prices despite several manufacturing exports, such as motor vehicles, maintaining positive growth. Consequently, investment growth remains underwhelming, non-building investment in particular, while national strategic project development continues to prop up building investment. Private consumption has posted limited gains, although social aid program (bansos) disbursements by the government have helped to maintain stable household consumption growth. Moving forward, the policy mix implemented by Bank Indonesia and the Government is projected to maintain national economic growth momentum towards the lower half of the 5.0-5.4% range in 2019 before increasing towards the midpoint of the 5.1-5.5% targeted for 2020.

Low and stable inflation remains under control. CPI inflation in August 2019 was recorded at 0.12% (mtm), decreasing from 0.31% (mtm) the month earlier. Annually, headline inflation in August 2019 stood at 3.49% (yoy), up slightly from 3.32% (yoy) in the previous period. Inflation was supported by controlled core inflation in line with anchored inflation expectations due to policy consistency by Bank Indonesia to maintain price stability, manage aggregate demand and minimise the impact of global prices. Core inflation has been edged up over the past few months by rising international gold prices as well as the second-round effect of higher volatile food (VF) inflation. The latest developments, however, point to lower VF inflation in line with maintained foodstuff supply. Meanwhile, administered prices recorded deflation in the reporting period due to lower transport fares, airfares in particular due to implementation of the airlines’ low season strategy. Moving ahead, Bank Indonesia will consistently maintain price stability and strengthen policy coordination with the central and regional governments to control inflation. Therefore, Bank Indonesia projects inflation in 2019 below the midpoint of the 3.5%±1% target corridor and within the target range for 2020, namely 3.0%±1%.

Bank Indonesia Slashes Interest Rates for 3rd Month

Bank Indonesia | Joana Ferreira |
9/19/2019 12:13:03 PM