Bank Indonesia eases policy rate for fourth time this year on weak inflation outlook

The Bank of Indonesia cut the policy rate by 25bps to 6.50 percent last Thursday and also trimmed its seven-day repo rate to 5.25 percent.

This was the fourth rate cut this year with the central bank taking advantage of subdued inflation at home and abroad and the more muted pace of Fed tightening. Recall that CPI inflation eased to 3.3 percent y/y in May from 3.6 percent y/y in April. The latest rate decision indicates that BI is more concerned about the pace of Fed tightening rather than the 'Brexit' vote (this Thursday). BI spokesman Segara said that 'Brexit' vote will create volatility in the IDR FX rate, but will remain manageable as the exposure to Europe is limited. But as we have been highlighting, the IDR has come under pressure in recent days, as demand for safe haven assets has increased.

Besides the rate cut, the central bank has also announced plans to relax rules on mortgage lending as part of measures to boost growth. The relaxed mortgage rules will allow commercial banks (with NPL's below 5 percent of their total assets) to offer higher value mortgage loans to property buyers. For example, qualifying banks will be allowed to provide mortgage loans to first-time homebuyers for as much as 85 percent of the property value (for property larger than 70 square meters), up from 80 percent currently. Similarly, the amount of mortgage loan for a second homebuyer (for property larger than 70 square meters) will be increased to 80 percent of the property value from 70 percent currently. BI will also allow banks to increase the disbursement of mortgages for properties under construction, depending on the progress of their construction. It is worth remembering that BI tightened mortgage rules in 2011 to prevent a bubble in the property sector.

At the same time, the government will continue with an accommodative fiscal policy with the focus primarily on the infrastructure sector. Last month, transport minister Jonan said that the government would purchase around 400 locomotive engines to expand its rail network, adding to the build 700 kilometers of rail track this year, out of its target of 3,258 kilometers. And earlier this year, the government allocated IDR 1.3 trillion to build six oil and gas downstream projects, including natural gas pipelines for households in six cities.