Indonesia's rate cuts on pause for now: economists

Bundles of rupiah notes at a currency exchange in Jakarta.
Bundles of rupiah notes at a currency exchange in Jakarta. Bank Indonesia left interest rates on hold in its Aug 19 decision.
AUGUST 20, 2020 - 7:39 PM

INDONESIA'S central bank is likely to be done with rate cuts for now, with the economy's recovery to be supported by quantitative measures instead, said economists after Bank Indonesia's Aug 19 decision to keep its policy rate unchanged at 4 per cent, in line with market expectations.

Compared to previous rounds, the tone of the press conference and the monetary policy statement were more optimistic, OCBC Bank economist Wellian Wiranto. "While the sharp downtick in Q2 GDP and still-tame inflation should technically give it room to ease further, the consideration for currency stability and yield attractiveness is paramount."

Though second quarter growth figures in Indonesia and abroad were dismal, higher-frequency indicators have shown continued recovery in July. Mr Wiranto noted that since May, the decline in retail sales has been slowing and consumer confidence has risen, as has the purchasing managers index.

Risk factors notwithstanding, "the recovery momentum itself has been encouraging enough to provide a good overarching reason for BI to refrain from cutting its policy rate further", he said.

He expects the central bank to retain its focus in driving growth via quantitative easing rather than further rate cuts, with tweaking of macroprudential measures -- regulations on vehicle loans, for example -- at the margin.

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Citi economist Helmi Arman similarly expects an extended pause, noting that portfolio inflows to the local currency bond markets have been weak.

Even if these inflows start to recover, the bar for further cuts is high, he added. This is because the pace of current account deficit and basic balance deterioration could also gain momentum, as economic activity further normalises.

"Large and sustained portfolio inflows are needed before any notion of further rate cuts could be put back on the table," he said.