Bank Indonesia cuts rate as economic recovery stalls

Jakarta

INDONESIA'S central bank cut its benchmark interest rate to a record low and downgraded its growth outlook amid fears that a resurgence in Covid-19 cases is slowing its economic recovery.

Bank Indonesia on Thursday slashed the seven-day reverse repurchase rate by 25 basis points to 3.5 per cent, the lowest level since the rate was introduced in 2016. The move was expected by 22 out of 29 economists surveyed by Bloomberg, while seven forecast no change.

"This decision is consistent with the forecast for inflation to remain low and the rupiah's maintained stability, as well as continued steps to boost the national economic recovery momentum," Governor Perry Warjiyo said in Jakarta. Faster rollout of vaccines, which would allow for greater personal mobility, could be a potential "game changer," he said.

Policy makers have signalled growing concern over the economy, as Indonesia's first recession in more than two decades threatens to spill over to this quarter after movement curbs were reimposed to control a surge in cases. Recent economic indicators have shown marked declines in imports, retail sales and consumer confidence.

The benchmark Jakarta Composite Index reversed earlier gains, falling as much as 0.3 per cent after the GDP forecast was lowered. The rupiah trimmed the day's losses after the decision, down 0.1 per cent at 14,029 to the US dollar as of 2.41 pm local time.

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"Today's cut is reflective of the importance of being seen to support growth," said Wellian Wiranto, an economist at OCBC in Singapore.

Bank Indonesia, which had expected the economy to turn around as early as the fourth quarter of last year, has taken a more cautious tone recently.

Mr Warjiyo said the bank now sees gross domestic product expanding 4.3 per cent to 5.3 per cent this year, down from an earlier forecast of 4.8 per cent to 5.8 per cent - even as he noted how vaccine roll-outs are boosting the global economic outlook.

The rate cut is the first of 2021 in the Asia-Pacific after central banks across the region eased policy last year amid the pandemic. Indonesian monetary authorities have now cut rates by a total of 150 basis points since the start of 2020.

"Too low" inflation, yet another sign of how weak demand has become in Indonesia's consumption-driven economy, gives the central bank ample room to keep monetary policy loose, Mr Warjiyo said last week.

Consumer prices rose by 1.55 per cent in January from a year earlier, well below this year's inflation target of 2-4 per cent.

Economists polled by Bloomberg expect inflation to remain weak this quarter at 1.62 per cent, down from a previous estimate of 1.82 per cent. Mr Warjiyo said on Thursday the bank still expects inflation to be within the target range this year.

He also said the bank was keeping macroprudential policy accommodative, relaxing rules for property and vehicle loans. The governor said there's ample liquidity in the financial system and urged banks to lower lending rates for customers more quickly.

While Thursday's cut limits the space for further reductions, Mr Warjiyo said the central bank "still has other options" to support the economy, such as quantitative easing, loose macroprudential policy and digitisation of payment systems. BLOOMBERG