Bank Indonesia cuts rates for the third time

Indonesia's central bank cut the policy rate by 25 basis points - the third rate cut taking the policy rate to 5.25%.

The decision was consistent with the broad consensus. We were in the minority, only seven out of 28 analysts in the Bloomberg survey forecasted no rate cut. A policy pause after two consecutive rate cuts looked more plausible in a turbulent market environment threatening the rupiah's stability.

September did bring some relief for markets, thanks to the slight thawing of US-China trade relations, making the case for opportunistic BI easing.

But the relief was short-lived and, in unanticipated support to our stable policy forecast came the Saudi Aramco facilities crisis causing the worst oil price spike in decades threatening IDR stability. Indeed, the IDR has been the worst-performing Asian currency this week, warranting stable BI policy.

Recall that currency weakness was behind all that aggressive policy tightening in 2018 with 175bp of rate hikes.

The central bank Governor Perry Warjiyo described today’s move as “a pre-emptive step to support the momentum of domestic economic growth amid slowing global economic conditions”. He also said, “The policy is consistent with an estimate for inflation to remain low at below the mid-point of our target range and the yield of domestic financial assets remaining attractive”.

Indonesia's central bank targets inflation in a 2.5%-4.5% range and it’s been under the 3.5% mid-point of this target since January 2018. Growth has been stuck around 5% since 2014 and BI sees it at 5.1% in 2019, or near the low end of its 5.0%-5.4% forecast range.