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Bank Indonesia Cuts Reserve Ratio in Cautious Easing Move

Karlis Salna, Viriya Singgih and Arys Aditya
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Bank Indonesia Cuts Reserve Ratio in Cautious Easing Move

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Indonesia’s central bank left its key interest rate unchanged while pumping more liquidity into the financial system to stimulate Southeast Asia’s largest economy.Bank Indonesia kept the seven-day reverse repurchase rate unchanged at 5% on Thursday following four rate cuts this year, in line with the prediction of 21 of 31 economists surveyed by Bloomberg. Banks’ reserve requirement ratio was cut by 50 basis points, the first such decision since June.

“This looks like a balancing act,” said Frances Cheung, head of Asia macro and strategy at Westpac Banking Corp. in Singapore. “Keeping the policy rate unchanged reflects the focus on maintaining rupiah stability,” while cutting the reserve ratio “fits into the objective of promoting credit expansion.”

After 100 basis points of rate cuts since July, the central bank is taking a more cautious approach in providing stimulus to the economy, turning to additional instruments to spur lending. With growth likely to remain subdued amid a sluggish global outlook, Governor Perry Warjiyo said there’s still room for more policy easing, either through monetary levers or macroprudential tools.

“Monetary policy remains accommodative and is consistent with controlled inflation in the target corridor,” Warjiyo told reporters in Jakarta. “Going forward, Bank Indonesia will monitor domestic and global economic developments in using its room to implement an accommodative policy mix.”

But Coordinating Minister for Economic Affairs Airlangga Hartarto was quick to call for further easing, saying there is “quite a large room” for the central bank to further cut the rate given benign inflation and a stable currency. The benchmark rate at 5% is “pretty high” compared to countries such as the Philippines, Malaysia and Thailand, he said in a statement.

The rupiah erased losses after the decision was announced to end little changed, while the yield on benchmark 10-year government bonds rose three basis points to 7.09%.

“There’s nothing to suggest they’re done with rate cuts,” said Mohamed Faiz Nagutha, a Singapore-based economist with Bank of America, which has forecast an additional 75 basis points of easing over the next few months. “Our call remains for a full unwind of the 175 basis points of hikes from last year.”

After raising rates last year to curb a currency rout, Bank Indonesia has switched its focus to supporting growth amid a global slowdown and the U.S.-China trade war. The central bank expects Indonesia’s economy to grow 5.1% this year.

What Bloomberg’s Economists Say

Significant scope for seasonal year-end risk aversion likely keeps the policy rate on hold for now in support of the currency -- especially as recent reports suggest a “Phase One” trade deal between the U.S. and China may not get done in 2019. The central bank’s pause in its rate cut cycle may extend only a short while into 1Q 2020.

Click here to read the full report.

Tamara Mast Henderson, Asean economist

Inflation remains subdued, with consumer-price growth at a six-month low of 3.1% in October. The central bank said Thursday that inflation for the full year is expected around 3.1%, well within the target band of 2.5%-4.5%.

A surprise trade surplus of $161 million in October eases pressure on the current-account deficit, which has been a key risk for the rupiah. The currency is up 3.5% against the dollar in the past year, among the top performers in Asia, with the bank saying it expects the currency to remain stable in line with fundamentals.

Reserve Ratio

The reserve requirement ratio for conventional banks was cut to 5.5% from 6%, and for Islamic banks to 4% from 4.5%, effective Jan. 2. Warjiyo said the RRR cut would add an additional 24.1 trillion rupiah in liquidity for commercial banks and 1.9 trillion rupiah for Shariah lenders.

“Liquidity is sufficient,” but there’s a problem in terms of the distribution of liquidity between groups of banks, he said.

Warjiyo said strong household consumption has kept the economy resilient, but falling imports of capital goods and raw materials show production hasn’t picked up significantly.

The central bank “may resume its easing cycle in early 2020 to give growth momentum an added boost” and further the government’s investment-driven growth plans, said Nicholas Mapa, an economist at ING Groep NV in Manila.

(Updates with comments economy minister in sixth paragraph)

--With assistance from Tassia Sipahutar, Harry Suhartono, Yoga Rusmana and Chester Yung.

To contact the reporters on this story: Karlis Salna in Jakarta at;Viriya Singgih in Jakarta at;Arys Aditya in Jakarta at

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

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