Indonesia’s Central Bank Cuts Interest Rates, Lowers 2020 GDP Forecast

Indonesia’s central bank, Bank Indonesia, reduced its benchmark interest rate – the seven-day reverse repurchase rate – by 25 basis points to 4.25% on Thursday, marking the third rate cut this year.

But it was the central bank’s first rate cut in three months.

“This decision is consistent with efforts to maintain economic stability and encourage national economic recovery amid Covid-19,” central bank Governor Perry Warjiyo said.

The central bank also said it sees room for lower interest rates in line with “mild inflationary pressures, maintained external stability and the need to stimulate economic growth.”

“We say there is room for further rate cuts. The timing would depend on global conditions and ensuring the stability of the rupiah [currency] is maintained,” Warjiyo said.

Wisnu Wardana, an economist at Bank Danamon PT in Jakarta said: “Taking into account today’s move, the real interest rate is relatively thin in comparison with emerging market peers, cautioning any move to utilize room for further easing. We still project another 25 basis-point cut in policy rates this year.”

Bank Indonesia, or BI, also reduced the country’s gross domestic product growth forecast for the year to the 0.9%-1.9% range from a prior projection of 2.3%.

BI expects the economy, Southeast Asia’s largest, to rebound in 2021 by showing growth of 5% to 6%.

“Exports are shrinking on global economic contraction, while household consumption and investment are decreasing due to large-scale social restrictions that have curbed economic activity,” BI noted. “[But] the export contraction is not as deep as previously projected in line with increasing demand from China. Furthermore, early indicators of domestic demand reveal the economy has reached its lowest level and is now entering a recovery phase.”

For now, the government expects the Indonesian economy will contract by 3.1% year-on-year in the second quarter -- the first such contraction since 1999 -- after growing by 2.9% in the first quarter. But Jakarta is pinning its hopes on a bounce-back in the second half of the year.

"We maintain that the economy is not experiencing a recession this year because there will be a recovery in the third and fourth quarters," said Finance Minister Sri Mulyani.

Indonesia is also concerned about a potential resurgence of the covid-19 pandemic.

"The risk of reinfections, thus partial retightening of restrictions, is high in our view," Citi economists wrote. "As of early June, Jakarta is estimated to have brought down the reproduction rate of the virus below one, but other regions are still in earlier phases of their respective cycles. The risk of relapse is high as borders between regions are porous despite checkpoints being installed in major highways. At some point we think there may be reaccelerations of infections in some of the reopened regions or subregions, which eventually leads to localized retightening of restrictions."