Bank Indonesia cuts reference rate by 25bps, likely to maintain easing bias

The Indonesian central bank, Bank Indonesia, today lowered the new reference rate (7-day reverse repo rate) by 25 basis points to 5 percent. Bank Indonesia’s decision to cut rate comes after the U.S. kept its rates on hold today but hinted at a near term tightening. Weak inflation, alongside stability in current account deficits and exchange rates, has created policy space for rate cuts, noted ANZ in a research not.

The Bank Indonesia is expected to maintain an easing bias even after today’s reduction. The extent of easing would be dependent on the size of tax amnesty inflows. In the wider policy objective of maintaining economic growth, monetary policy should be on the front burner in the midst of fiscal constraints, in particular with room created by the inflation undershoot, said ANZ.

Any tax amnesty revenue shortfall would be required to be countered by reduced expenditure to avert the fiscal deficit from rising. In particular, there is still space to further streamline operating expenditure that might result in savings of IDR 100 trillion, greatly countering lower revenue and averting a considerable shortfall. This would decelerate public spending growth and worsen the current weakness in domestic conditions. Already, private sector investment and household consumption are declining, stated ANZ.