Bank Indonesia cuts key interest rate by 25 bps to 4.75 pct, likely to cut one more time

Bank Indonesia cut its key interest rate by 25 basis points today to 4.75 percent after a three-month pause. The cut made today marked the resumption of the central bank’s rate cutting cycle. The BI had previously lowered its policy rate by 25 basis points each in its monthly meetings from July to October last year before keeping its policy rate on hold from November to January.

The decision shows a desire to pre-emptively guard against rising downside growth risks stemming from the COVID-19 outbreak. The central bank forecasts that the virus will disrupt the global economic rebound and today cut its 2020 global growth forecast to 3 percent. It also lowered the 2020 growth forecast of Indonesia to 5-5.4 percent from 5.1-5.5 percent.

“Looking ahead, BI may not be done with easing just yet. BI governor Perry Warjiyo stated in his press conference that the central bank will maintain an accommodative stance, and notably, BI now sees a >50  chance of a US Fed rate cut by September”, said ANZ in a research report.

Domestic growth and inflation dynamics also indicate towards an easing bias. The fourth quarter GDP data released earlier this month indicated that the economy had decelerated further in the fourth quarter, with GDP growth printing only 4.97 percent year-on-year, the slowest in three years.

“Putting all of this together, provided external stability is maintained, the combination of sluggish growth and benign inflation suggests BI is likely to favour easing a little further. We now expect one more 25bp rate cut in the central bank’s easing cycle”, added ANZ.