U.S. Markets close in 54 mins

Indonesia Has Space to Cut Rates as Rupiah Gains: Decision Guide

Karlis Salna

(Bloomberg) -- Indonesia’s central bank is expected to cut its benchmark interest rate for the third time this year as recent gains in the currency allow policy makers to shift their focus to bolstering the economy amid the coronavirus pandemic.

Bank Indonesia will lower its benchmark rate by 25 basis points Tuesday to 4.25%, according to 19 of 25 economists surveyed by Bloomberg, with the rest expecting no change. The central bank, which paused last month after lowering rates at two consecutive meetings, has already flagged that another cut may be in the pipeline.

Indonesian officials are increasingly worried about the stability of the financial system as they battle a health crisis and economic growth that slowed to its worst level in almost two decades at the start the year. With the rupiah on an upward trajectory, Bank Indonesia Governor Perry Warjiyo signaled last week there’s room for further easing.

“The coast is clear for a prudent interest-rate cut,” said Satria Sambijantoro, an economist at PT Bahana Sekuritas in Jakarta, pointing to the rupiah’s gains over the past month. A concurrent drop in consumer-goods imports -- down more than 16% last month -- signals weakness in purchasing power, he said, and justifies concerns about second-quarter growth.

Here’s what to look for in Tuesday’s decision:

Growth Fallout

Like many countries, Indonesia is reeling from the hit to trade and consumer demand as millions have lost their jobs. The government and central bank have slashed their growth forecasts for the year, with gross domestic product now expected to expand 2.3%, compared to an initial projection of 5.3%.

Read: Indonesia Slashes Growth Forecast by More Than Half on Virus (2)

Finance Minister Sri Mulyani Indrawati has warned of a possible “domino effect” from the virus, which already has prompted much larger capital outflows than the global financial crisis did. The central bank expects economic growth to rebound next year, to 6.6%-6.7%.

Officials are discussing how to reopen the economy, but with local deaths from the pandemic topping 1,000, President Joko Widodo ruled out an immediate easing of social-distancing steps and ordered officials to strictly enforce a travel ban during the busy holiday season.

Rupiah Rally

After a period of sustained pressure on the rupiah -- a major factor in the bank’s decision to keep borrowing costs steady last month -- the currency has been gaining against the dollar in recent weeks. That’s likely removed a key barrier to further easing.

The rupiah is up more than 4% against the dollar in the past month, the best performer in Asia, paring its decline for the year to about 6.6%.

Warjiyo has said further easing is contingent on market stability, adding that the rupiah remains “fundamentally undervalued” and pledging to intervene in the market if necessary to support the currency.

Trade Slump

With global demand reeling from the virus, Indonesia’s exports have slumped and its imports plunged for a 10th straight month in April, reflecting a significant downturn in consumer spending. Exports fell 7% from a year ago while imports declined 18.6%, resulting in a trade deficit of $345 million.

Read: Indonesia’s Trade Slumps as Virus Takes Heavy Toll on Economy

The fall in imports is a worrying sign for the overall health of Indonesia’s economy, which depends on consumer spending from a population of almost 270 million.

The current-account deficit remains a key vulnerability and was one of the main reasons Indonesia was hit so hard in last year’s emerging-market upheaval. Concerns have subsided -- the central bank expects a shortfall of less than 2% of GDP this year -- but haven’t disappeared altogether. Warjiyo has said the current-account deficit is set to widen to 3%-4% of GDP next year as the economy heats up.

For more articles like this, please visit us at bloomberg.com

Subscribe now to stay ahead with the most trusted business news source.

©2020 Bloomberg L.P.