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Bank Indonesia sees room to cut interest rates, according to Governor Perry Warjiyo, raising the prospect of Southeast Asia’s biggest economy easing monetary policy in the face of growing risks to growth.
"If we take into account low inflation and economic growth that needs to be pushed, indeed, we already know that there’s room to lower interest rate," Warjiyo told lawmakers on Monday, without giving any indication of timing. "As of now, global financial market condition is still full of uncertainties, whether related to trade war, Brexit, geopolitics etc, which can lead to capital flows reversal and bring risks in financing the current-account deficit."
Central banks around the globe have been shifting to a looser monetary policy position as they look to counter slowing demand with India, Australia, New Zealand, the Philippines and Malaysia all cutting rates in recent weeks. While Indonesia’s economy has been growing at about 5%, officials are also increasingly concerned about risks to growth, citing an escalation in trade hostilities between the U.S. and China.
Indonesia’s central bank is scheduled to make its next interest rate announcement on Thursday. If it lowers the rate, it would be the first cut since September 2017, and mark the beginning of an unwinding of a tightening cycle that began in May last year and delivered a total of 175 basis points of hikes.
Only five of the 28 economists surveyed by Bloomberg before the comments from Warjiyo predicted the bank would cut interest rates on Thursday.
"The combination of the U.S. Fed signaling an openness to easing, falling U.S. treasury yields, rate cuts by its regional peers, and lower global oil prices give BI scope to pull the trigger," said Krystal Tan, an economist at Australia and New Zealand Banking Group Ltd. in Singapore. "Barring a sharp sell-off in the rupiah in the coming days, we think its first cut could materialize as soon as this week."
(Updates with comments from economist in final paragraph.)