Bank Indonesia cuts RRR; flags start of easing cycle

Bank Indonesia (BI) lowered its reserve requirement ratio from 8.0% to 7.5%, with effect from 1 December, in an attempt to ease policy in a way that does not stoke currency volatility. Though not exactly a 25bp policy rate cut against consensus expectations of an on-hold decision, the RRR cut was consistent with our expectation for the central bank to begin easing policy from the November meeting.

"We maintain our forecast for BI to resume its easing cycle in Q1 16 amid a more favourable inflation outlook (forecast: 4.4%; BI: 4.7%)",says Barclays.

Today's decision was a tussle between growth stimulus and currency stability. The recent divided comments made by governor and government officials also reflected a difficult dilemma faced by BI. The sharp fall in the inflation trajectory back to BI's forecast range of 3-5% in Q4 and better external balance opened up scope for further easing. However, the resurgent concerns about IDR vulnerability in the wake of looming Fed normalisation (most likely in December) has stopped BI from acting today.

In a sign that it's doing more to support its faltering economy, BI lowered the RRR, a move that is expected to inject an additional IDR18trn of lending capacity to the banking system, as estimated by BI. This underscores the clear need for further easing. It is believed BI will hold its easing bias and remain vigilant on the currency in the run-up to the December FOMC meeting. This is also consistent with BI's comment post the decision when it hinted that further easing is still likely if market reaction to the Fed liftoff is muted.

"We maintain our forecast and expect BI to resume its easing cycle in Q1 16 and look for two 25bp rate cuts in Q1 and Q2, respectively. We believe the focus on stimulating growth will shift back to fiscal spending, deregulation and the easing of macroprudential measures to revive growth and foreign investment", added Barclays.