Indonesia Seen Lowering Rates as Recovery Dims: Decision Guide

(Bloomberg) -- Indonesia’s central bank is expected to resume lowering interest rates Thursday after a two-month pause as a recovery in Southeast Asia’s biggest economy struggles to gain traction.

Bank Indonesia will cut its benchmark interest rate by 25 basis points to 3.5%, according to 22 of 29 economists surveyed by Bloomberg, with the rest expecting no change. The central bank, which cut rates by a total of 125 basis points last year, has said recently it still has room for further easing amid concerns that inflation is “too low” and the economy is slow to recover.

“We’ve been calling for more monetary easing for some time now, since there were clear downside risks for both growth and the inflation outlook,” said Mohamed Faiz Nagutha, an economist with Bank of America Securities in Singapore. After some fourth-quarter data disappointed and movement restrictions were reimposed last month in key areas of the country like Java and Bali, “these risks are in fact materializing,” he said.

Finance Minister Sri Mulyani Indrawati recently said the economy may be essentially flat in the first quarter and the range for 2021 gross domestic product growth will likely be lower than previously estimated. Still, for now the government is maintaining its 5% growth target.

Here’s what to look out for in Thursday’s policy decision:

Stalling Recovery

Indonesia is struggling to turn around its economy after GDP contracted 2.07% in 2020, and the now is seen likely to grow between 4.3% and 5.3% this year. Stimulus spending has pushed past 600 trillion rupiah ($42.9 billion) as the government accelerates the country’s vaccination drive and tries to lift demand with various incentives.

Analysts will want to see if the central bank revises down its own 4.8%-5.8% growth projection for 2021.

Bank Indonesia “is very much aware of the need for monetary support as the latest economic data releases – from weak retail sales and building construction growth, to low core inflation and credit growth – all pointed to stalling recovery momentum,” said Satria Sambijantoro, an economist at PT Bahana Sekuritas in Jakarta.

Benign Inflation

Bank Indonesia Governor Perry Warjiyo said recently that consumer price gains have eased too much and demand has yet to show solid improvement. Core inflation rose at the slowest pace since 2004 in January, while headline inflation remained modest at 1.55% year-on-year.

Still, the monetary authority expects headline inflation within the 2%-4% target this year and pledged a stronger partnership with the government to manage prices, especially of food.

Currency Stability

The rupiah, which has declined 2.4% against the dollar over the past year, has largely stabilized and is up just 0.2% over the past month. Indonesia’s trade surplus beat estimates at $1.96 billion in January, adding support to the currency.

“With the rupiah holding steady at around the 14,000 level and trade balances staying strongly in surplus, we now expect BI to cut its policy rate by 25 basis points this week,” Bank of America Securities’ Nagutha said.

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