Bank Indonesia Cuts Rates in Shock Move

Bank Indonesia reduced its 7-day reverse repo rate unexpectedly by 25bps to 5.50 percent during its August meeting, the second straight cut in two months, in an attempt to support growth amid low inflation expectations. Last month's rate cut was the first time since September 2017 amid growing concerns about global growth due to continued trade tensions and a number of geopolitical risks. The overnight deposit and lending facilities were also trimmed by the same amount to 4.75 percent and 6.25 percent, respectively.

Excerpts from the Bank Indonesia press release:

This policy is consistent with low inflation forecasts that are below the midpoint of the target, continues to attract investment returns on domestic financial assets so as to support external stability, as well as pre-emptive measuresto push forward economic growth momentum from the impact of the global economic slowdown. The monetary operations strategy will continue to be directed at ensuring adequate liquidity and improving money market efficiency so as to strengthen the transmission of accommodative monetary policy. Macroprudential policies remain accommodative to encourage bank lending and expand financing for the economy, including environmentally friendly financing. Payment system policies and financial market deepening are also continuously strengthened to support economic growth. Going forward, Bank Indonesia will continue to accommodate an accommodative policy mix in line with low inflation forecasts, maintained external stability, and the need to continue to drive economic growth momentum.

Continued tensions in trade relations and a number of geopolitical risks further depress trade volume and world economic growth.The US economy is slowing down due to falling exports and non-residential investment. Economic growth in Europe, Japan, China and India was also lower due to the decline in external sector performance and domestic demand. The weakening of the global economy continues to depress commodity prices, including oil prices. To respond to the impact of slowing economic growth, various countries implemented fiscal stimulus and eased monetary policy, including the US central bank which in July 2019 had lowered its policy rates. The uncertainty of global financial markets also continued and led to a shift in the placement of global funds to assets considered safe such as US and Japanese government bonds and gold commodities.

Inflation remains under control at a low and stable level. CPI inflation in July 2019 was recorded at 0.31% (mtm), down from the previous month inflation of 0.55% (mtm). On annual basis, inflation in July 2019 was recorded at 3.32% (yoy), a slight increase compared to inflation in the previous month of 3.28% (yoy). Controlled inflation is driven by maintained core inflation supported by good expectations in line with Bank Indonesia's policy consistency in maintaining price stability, managed aggregate demand, and the effect of minimal global prices. Administered prices groupre-noted deflation was affected by the continuing impact of the policy of lowering the upper limit of air freight rates, as well as the correction of intercity transport rates and railroad fares after the Eid holiday. Meanwhile, volatile food inflation slowed, although the price development of some horticultural commodities still needs attention. Bank Indonesia remains consistent in maintaining price stability and strengthening policy coordination with the Government, both at the central and regional levels, to ensure inflation remains low and stable amidst the challenges of weather disturbances due to drought which is expected to have an impact on food supply. 2019 inflation is predicted to be below the midpoint of the target range of 3.5 ± 1% and maintained within the target range of 3.0 ± 1% by 2020.

Bank Indonesia Cuts Rates in Shock Move

Bank Indonesia | Joana Ferreira |
8/22/2019 8:35:06 AM