Indonesia central bank seen cutting key rate again

Indonesia’s central bank, which kept its benchmark reference rate unchanged for nearly all of 2015, is expected to make its second cut this year on Thursday as it tries to bolster the country’s sluggish growth.

South-East Asia’s largest economy grew 4.8% in 2015, the fifth straight year of slowing and the weakest pace since 2009. But growth picked up in the final quarter, showing some signs of recovery.

Bank Indonesia (BI) trimmed its key rate by 25 basis points last month. Thirteen of 19 economists in a Reuters poll predict a same-size cut on Thursday, reducing the rate to 7%.

Many economists believe BI is at the start of an easing cycle, as there’s room for monetary easing that there was not in 2015, when inflation sometimes topped 7% and anticipation of higher US interest rates pressured the fragile rupiah, which was emerging Asia’s second worst performing currency last year.

The rupiah was not rattled by the Federal Reserve’s hike in December, and it has strengthened more than 2% against the dollar this year. BI deputy governor Perry Warjiyo said last week the rupiah is heading towards a level reflecting the country’s economic fundamentals.

ROOM TO EASE?

The rupiah’s appreciation gave “room for BI to ease its monetary policy even further. BI will make use of this opportunity to do just that, in a bid to help sustain the upward momentum in GDP growth,” said DBS’ economist Gundy Cahyadi.

Low inflation and a deep slump in January exports and imports also support the argument for early rate cut, economists said.

“Weak exports and capital goods imports mean further policy boost to aid economic recovery is warranted,” said Credit Suisse economist Santitarn Sathirathai.

Not all agree. Six analysts surveyed by Reuters said the central bank will hold the benchmark at 7.25%.

“BI is keen to avoid a repeat of the 2013 ‘Taper Tantrum’, which saw the central bank having to hike rates aggressively to support the struggling rupiah,” said Capital Economics in a note projecting no second rate cut until the second quarter.

CIMB Niaga economist Winang Budoyo, who has pencilled in a hold this week, predicted that BI will lower the rate in March instead.

BI has a policy meeting scheduled for March 17-18, right after the Fed’s next policy meeting on March 15-16.