(Bloomberg) -- Bank Indonesia, which surprised markets this week by cutting interest rates ahead of the Federal Reserve, is expected to keep lowering borrowing costs this year, but at a slower pace than in the US.
Analysts said Indonesia’s central bank may cut borrowing costs again as soon as its October policy meeting, especially if the currency strengthens further. Indonesia’s finance ministry yesterday raised its assumptions for the rupiah against the dollar and said it anticipated lower bond yields.
BI unexpectedly slashed its key rate by a quarter-point to 6% on Wednesday, its first easing in over three years. But Governor Perry Warjiyo’s pronouncement that monetary policy will now be “balanced between economic growth and currency stability” could suggest BI may not pursue deeper rate cuts than in the US, which would put rupiah gains at risk.
Indonesia’s policy rate is likely to end up at a higher level than the pre-pandemic 5% level “given the backdrop of more volatile exchange rates in recent years,” HSBC Holdings Plc economists Pranjul Bhandari and Aayushi Chaudary wrote in a note.
BI’s concerns over Indonesia’s economic outlook may not be as pressing either, as it still maintained its forecast for gross domestic product growth above 5% through the end of next year. Credit growth slowed in August but stayed at the upper end of the 10%-12% target band.
“Note that the last BI-Rate easing cycle occurred when Indonesia’s credit growth fell 0.8% year-on-year,” economists Satria Sambijantoro and Purbiantoro Lintang at PT Bahana Sekuritas wrote. “The latest rate-cut from BI appears to be a preemptive move to sustain economic expansion, rather than a reactive measure to counteract a sharp slowdown.”
Here’s what economists are saying:
Rina Jio, Goldman Sachs Group Inc.
- We pull forward our expectations for BI policy rate cuts this year, specifically expect two 25-basis point policy rate cuts in the fourth quarter (from one previously) and another 25 basis point cut in the first quarter of 2025
- Terminal rate forecast at 5.25%
Miguel Chanco, Pantheon Macroeconomics
- BI’s easing cycle will be more gradual than the Fed’s, with another 25 basis points cut likely in the fourth quarter, potentially as soon as next month, and an additional 50 basis points in the first quarter
- Headline inflation likely will fall temporarily below the 1.5% lower-bound of the target range in the first quarter amid moderating food inflation
Brian Lee Shun Rong and Chua Hak Bin, Maybank Securities Pte.
- The surprise policy rate cut suggests that BI is placing more emphasis on supporting the economy
- Our view is for BI to cut by another 50 basis points in the remaining months of 2024 and further 75 basis points in 2025
- The central bank may retain a degree of vigilance on the rupiah, and thus opt not to cut as aggressively as the Fed over the next year
Satria Sambijantoro and Purbiantoro Lintang, PT Bahana Sekuritas
- There’s slim probability for an immediate rate-cut next month as it would require BI to front-run the Fed again. A 25-basis points rate-cut each in November and December seems more feasible
- Currency movements will be crucial for BI: a sharp appreciation of the rupiah to below 15,000 per dollar could suggest another rate cut next month
Josua Pardede, PT Bank Permata
- Considering the Fed’s monetary policy outlook, Indonesia’s low inflation trajectory, a manageable current account, and the expected appreciation of the rupiah, we now foresee additional rate cuts of 25-50 basis points this year
Lavanya Venkateswaran, Oversea-Chinese Banking Corp.
- Our baseline is for another 25 basis points rate cut this year, followed by a cumulative 75 basis points in 2025
- The risk is that BI brings forward rate cuts into next quarter and follows through with a deeper rate cutting cycle than our current baseline
Kai Wei Ang and Rahul Bajoria, Bank of America NA
- We now expect BI to cut twice (from once previously) by 25 basis points each next quarter, and thereafter by 25 basis points each quarter through early 2026
- We don’t expect BI to follow the Fed with 50 basis points cuts. It may consider doing smaller cuts more frequently, and may consider a faster pace of rate cuts
--With assistance from Matthew Burgess.
©2024 Bloomberg L.P.
