Another interest rate cut

INDONESIA - Report 27 Sep 2019 by Cyrillus Harinowo

At its recent Monetary Policy Meeting in September 2019 the Indonesian Central Bank decided to slash the benchmark interest rate once again by 25 basis points, to 5.25%. This is the third interest rate cut in the past three consecutive months. The interest rate cut was driven by the softening of the economy as well as the interest rate cut by the US Federal Reserve. As if this policy were not strong enough, Bank Indonesia also eased its macroprudential policy by loosening the loan-to-value ratio for mortgage loans as well as easing the down payment requirement for vehicle loans (car loans as well as motorcycle loans).

Apparently, the focus of Bank Indonesia's attention was more on the slowing growth of the economy, even though the country still suffered a deficit in its current account. While some observers already expected this rate cut, there were nonetheless​ some who were caught by surprise, especially with the intensity of the rate cuts of the past months. However, the Central Bank stated firmly that the interest rate cut was necessary to mitigate the impact of the slowing global economy on the domestic macro economy.

In addition to the easing of monetary policy, the Indonesian government should also maintain its goal of reforming the bureaucracy. The weakness in this factor became apparent recently, when many companies were moving from China but none decided to relocate to Indonesia. The main reason was regulatory uncertainty, which hindered the establishment of investments in the country.

In the midst of this situation, the Indonesian balance of trade for August 2019 registered a small surplus. Exports in August 2019 reached $14,280.3 million, down 7.6% month over month and 9.99% year over year. Meanwhile, imports reached $14,195.2 million, down 8.53% month over month and 15.6% year over year. This brought the trade balance for August to a surplus of $85.1 million. With that surplus, the total trade balance for the first eight months of 2019 registered a deficit of $1,811.7 million.

The Central Board of Statistics also released the inflation report, which showed inflation of 0.12% in August. With that performance, Y/Y inflation stood at 3.49%, a level at the lower part of the target corridor of the Central Bank. With inflation largely under control, and the real economy slowing, factors were in place for the Central Bank's decision, mentioned above, to cut the benchmark interest rate by 25 basis points to 5.25% at its monetary policy meeting in September.

Now read on...

Register to sample a report

Register