Indonesia’s central bank surprised most economists on Tuesday by lowering interest rates, reflecting its relative comfort with the currency and inflation outlook.

The benchmark rate was cut by a quarter point to 4.5 percent, with all but six of the 28 economists surveyed by Bloomberg predicting it would stay on hold. Bank Indonesia reduced borrowing costs six times last year, making it Asia’s biggest rate cutter.

Governor Agus Martowardojo and his board had put policy easing on hold until now, concerned that tightening U.S. monetary policy may spur outflows from emerging markets and undermine the currency. With the Federal Reserve sticking to gradual rate hikes in the face of subdued inflation, the rupiah has been relatively stable this year, gaining about 1 percent against the dollar.

“The central bank probably thinks the financial system is now stronger and the impact of federal fund rate hikes would be marginal or could be managed by improving fundamental conditions in the Indonesian economy,” said Josua Pardede, an economist at PT Bank Permata in Jakarta.

Bank Indonesia said the move was motivated by an improving inflation outlook and expectations of only one more U.S. rate increase, delayed to later this year. Officials also cited the rupiah and current-account deficit remaining “manageable.”

Indonesia follows central banks in India and Vietnam in easing monetary policy in recent months as low inflation gives policy makers in Asia room to provide stimulus to their economies. Six rate cuts last year in Indonesia had failed to spur economic growth above 5 percent, while credit demand is still lackluster, enabling the central bank to restart its easing cycle.

“The rate cut from BI is a measured move, as it is coming on expectations of lower inflation, and reasonable growth,” said Rahul Bajoria, an economist at Barclays Plc in Singapore, who had correctly predicted the decision. “We believe the central bank remains focused on maintaining financial stability, and any further easing will be done keeping that in mind.”

Bank Indonesia sees inflation averaging about 4 percent this year and below 3.5 percent in 2018. Inflation slowed to 3.9 percent in July from 4.4 percent in June, remaining within the bank’s target band of 3 percent to 5 percent.

The rate cut may spur consumer spending and help to boost sentiment for property and automotive stocks, said Jeffrosenberg Tan, head of strategy at Sinarmas Sekuritas. The Jakarta Composite Index, the nation’s benchmark stock index, has jumped 11 percent this year, reaching a record last week.

While Indonesia’s economy is growing about 5 percent, that’s still short of President Joko Widodo’s 7 percent goal he set when he came to office three years ago. The central bank said loan growth, which slowed to 7.8 percent in June, will average 8 percent to 10 percent this year. The economy is seen improving, expanding an estimated 5.1 percent to 5.5 percent in 2018, it said.

Source:
courtesy of BLOOMBERG

by Karlis Salna

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