Bank Indonesia keeps policy rate on hold at 5 pct, likely to cut by 25 bps in Q1 2020

Bank Indonesia kept the 7-day reverse repo rate unchanged at 5 percent today, as was anticipated. Moreover, the central bank also kept its 2019 and 2020 growth, inflation and current account deficit forecasts the same.

Today’s decision was the second consecutive month that the central bank maintained its policy rate after cutting 25 basis points at each of its monthly meetings from July to October in 2019.

Bank Indonesia kept its 2019 and 2020 growth projection at 5.1 percent and 5.1-5.5 percent, respectively. The current account deficit is expected at 2.7 percent GDP this year and at 2.5 to 3 percent next year. Meanwhile, inflation is expected at 3.1 percent and 2-4 percent in 2019 and 2020, respectively.

Bank Indonesia hinted that monetary policy continues to be accommodative and its plans to strengthen the accommodative policy mix, implying an easing bias remains. The combination of sluggish growth and contained inflation underpins the case for easing, according to an ANZ research report.

The third quarter GDP data of Indonesia indicated that growth has slowed to a two-year low, and available data for the fourth quarter are not indicating to a material turnaround. Credit growth has also been slowing. Both headline and core inflation had eased in November and are not likely to pose hurdles to rate cuts.

However, with the U.S. Fed concerned of lower its policy rate further, BI has less leeway to cut its policy rate without undermining the relative yields of domestic financial assets. The still high current account deficit signals that the IDR is vulnerable to shifts in global risk sentiment, and this might restrict the room for further cuts.

“We note that the trade deficit widened in November amid weak export revenues and a rebound in consumer imports. We see scope for one more 25bp rate cut in the current cycle, probably in Q1 2020”, added ANZ.