Indonesia surprises with second rate cut in a row, eyes global slowdown

By Maikel Jefriando and Tabita Diela
An employee counts Indonesian rupiah banknotes at a currency exchange office in Jakarta

By Maikel Jefriando and Tabita Diela

JAKARTA (Reuters) - Indonesia's central bank, hoping it can spur faster growth at home despite a global slowdown, surprisingly cut its key interest rate for a second time in two months on Thursday.

Bank Indonesia (BI) cut the 7-day reverse repurchase rate by 25 basis points (bps) to 5.50%. Only two of 19 economists in a Reuters poll predicted the cut, the other 17 forecast a hold after recent global financial volatility that hurt the often-fragile rupiah.

"Economic growth momentum continues, but of course we must take anticipative steps, pre-emptive steps to face the risk of global economic slowdown," Governor Perry Warjiyo told reporters after a two-day policy meeting.

Last month, BI cut its key rate by 25 bps, the first loosening since September 2017, and some predicted that was the start of an easing cycle to unwind BI's 175 bps of tightening in 2018.

But volatility in world markets early this month made many economists predict that BI would hold on Thursday, and make a second cut later.

After Thursday's announcement, some economists doubted there would be further trims anytime soon.

Josua Pardede, economist of Bank Permata, said that the absence in the BI statement of mention of further loosening indicated this "will be limited until the end of this year".

But ANZ said it is pencilling 50 bps more of cuts by the end of this year, instead of 25 bps.

The governor, when asked about further cuts, said BI would continue with an "accommodative policy mix", including by exploring rules on lending or liquidity to spur bank credit.


DIFFERING SCENARIOS

Warjiyo said that BI's base scenario - which he acknowledged differs from market ones - is that the Federal Reserve won't make any more cuts in U.S. interest rates this year.

BI's next policy meeting will end on Sept. 19, just hours after the close of the next Fed policy meeting - at which markets expect a second cut in U.S. rates following the first in a decade, in July.

ING economist Nicholas Mapa said BI will watch closely moves of the Fed and the rupiah "before seriously considering further rate cuts in the near term".

Capital Economics said the uncertain outlook for the rupiah "means that any further loosening is likely to be very gradual".

The governor also said another central bank baseline scenario is for no escalation in the United States-China trade war.

Satria Sambijantoro, economist of Bahana Sekuritas and one of the two economists predicting Thursday's cut, called it "a vote-of-confidence from BI as Indonesia's domestic fundamentals are not as gloomy as the market sees it."

The central bank was certain inflation at home will remain within target, though it may be slightly faster than initially expected due to drought driving farm prices higher, Warjiyo said.

BI maintained its outlook for 2019 GDP growth at below the midpoint of its 5.0%-5.4% forecast range, while its outlook for 2020 was the middle of 5.1%-5.5% range.

The rupiah, which strengthened marginally to 14,225 against the dollar on the BI announcement, slipped to 14,230 at 0925 GMT, near the previous day's closing.


(Additional reporting by Fransiska Nangoy; Writing by Gayatri Suroyo; Editing by Richard Borsuk)