Bank Indonesia Signals Cautious Approach to Further Easing

(Bloomberg) --

Indonesia's central bank has sounded a more cautious tone on interest rates, signaling that the 175 basis points of tightening seen last year may not be fully unwound in the current easing cycle.

Further cutting the benchmark interest rate “is not the only weapon” Bank Indonesia can employ, Senior Deputy Governor Destry Damayanti said in an interview Friday. Policy makers also must ensure that Indonesian assets remain attractive to investors, she said, a potential reason not to lower the benchmark rate too far.

Indonesian officials have become increasingly worried about the state of Southeast Asia's largest economy amid a global slowdown and the U.S.-China trade war. The government has revised down this year's growth projection several times, with the economy on course for its slowest expansion since 2017.

The bank now wants to gauge the impact of an aggressive stretch of rate cuts since July -- 100 basis points in all. While easing remains on the table, it's not a given that the depth of rate cuts will match the extent of last year's tightening, Damayanti said.

“We cannot say that. It really depends on the situation, global and also domestic,” she said. “We still have to maintain the attractiveness” of Indonesian assets, she added, pointing to the spread between local and U.S. rates.

Not Good Enough

Indonesia's economy has lost momentum in every quarter this year. Gross domestic product is forecast to expand about 5.1% this year, down from an initial projection of 5.3%.

“Is it enough if Indonesia only grows at 5%? Of course not,” Damayanti said. “We need more acceleration in growth.”

The impact of this year's rate cuts will start to be felt in the first quarter of 2020, she said. Damayanti said the central bank is confident the economy will pick up in 2020, with growth expected closer to the midpoint of a 5.1%-5.5% range and private consumption seen growing about 5%.

Inflation for all of 2019 is expected to come in at 3.1% after the consumer price index hit a seven-month low of 3% in November. The central bank is set to cut its inflation target band to 2%-4% in 2020, from 2.5%-4.5% this year.

Policy Mix

Bank Indonesia will keep policy accommodative to support growth, but may use other tools beside rate cuts, Damayanti said. Last month the central bank held its benchmark rate steady but lowered the proportion of funds banks must keep in reserve, a step to pump cash into the economy.

Damayanti said the bank might opt for further adjustments to reserve ratio levels and other macroprudential levers.

“We're using a mixed policy,” she said. “The interest rate is not the only weapon we have.”

To contact the reporter on this story: Karlis Salna in Jakarta at ksalna@bloomberg.net

To contact the editors responsible for this story: Nasreen Seria at nseria@bloomberg.net, Michael S. Arnold, Thomas Kutty Abraham

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