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Aldian Taloputra, senior economist at Standard Chartered, notes that Bank Indonesia (BI) delivered a 25bps cut at its October meeting, bringing the policy rate to 5.0%, in line with consensus but against their expectations that it would pause.

Key Quotes

“Manageable inflation, attractive domestic interest rates and a pre-emptive policy stance to support growth encouraged BI to deliver its fourth rate cut this year. BI sees Q3 GDP growth coming in below its expectation of 5.1%, led by the ongoing global slowdown. However, it still expects growth to rebound to the middle of the target range of 5.1-5.5% in 2020, on improving investment, structural reform and looser monetary policy. BI sees corporate investment starting to pick up in Q4, partly helped by stronger transmission of looser monetary policy to markets.”

“We maintain our call for a 25bps cut in December, which should bring the policy rate to 4.75% by the end of this year, but no longer expect a February cut following today’s move. We think the weak global environment will keep interest rates low globally and support Indonesian rupiah (IDR) stability. This, combined with a contained current account deficit, should provide further room for policy easing.”

“The risk is that BI could loosen (by cutting the policy rate or reserve requirement ratio) earlier than we expect, in November, if Q3 GDP growth is lower than expected. We do not rule out possible further policy easing next year; however, with real policy rates already having fallen notably, we think BI will need to proceed cautiously, particularly given likely rising inflation.”

“We expect inflation to increase in H1-2020 (closer to 4%) due to low base effects and administered price adjustments, such as diesel, electricity tariffs and cigarettes that could add around 1ppt to the headline inflation number.”