Bank Indonesia’s rate cut shows comfort with inflation outlook

Bloomberg

Indonesia’s central bank surprised most economists 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 US 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 US 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.