Bank Indonesia cuts key policy rate by 25 bps to 4.25 pct, likely to cut again in Q3

As expected, Bank Indonesia lowered its key policy rate by 25 basis points to 4.25 percent against a backdrop of a recovering IDR and soft economic outlook. The rate cut made today marked the resumption of the central bank’s rate cutting cycle after a two-month hiatus. Bank Indonesia has now lowered its policy rate by a total of 175 basis points since July 2019, fully unwinding the rate hikes undertaken in 2018.

The decision shows a desire to stimulate economic growth. Monthly indicators imply the economy possibly shrank in the second quarter, said ANZ in a research report. For example, capital goods imports and retail, vehicle and cement sales have all dropped, which bode poorly for domestic demand. The manufacturing PMI also collapsed, and came in below 30 in April and May.

According to BI, the Indonesian economy is likely to grow 0.9 percent to 1.9 percent in 2020. Meanwhile, inflation is likely to come in at 2-4 percent, while the current account deficit is expected at around 1.5 percent of GDP.

BI governor Perry Warjiy noted in his press conference that the central bank keeps an accommodative policy stance and sees room for further rate cuts. He also stated that BI will continue to underpin the economy through its government bond purchases from the primary market and liquidity provisions.

“The challenging growth environment warrants further policy support. What’s more, with the domestic COVID-19 outbreak not past its worst yet, there is a material risk that the economy comes under renewed pressure. However, the timing and scope for rate cuts will also be dependent on IDR stability. Rising external uncertainty amid concerns about a second wave of infections globally could weigh on risk sentiment. On balance, we see another 25bp rate cut in Q3”, added ANZ.