An Unexpected Interest Rate Cut by Bank Indonesia

August 22, 2017

Indonesia became the latest central bank from an emerging market economy to cut its interest rates. The previous six changes, each like today’s move a cut of 25 basis points, were implemented from January to October in 2016. Then easing was stopped because officials worried that Fed rate normalization would expose the rupiah and Indonesian inflation to downward and upward pressure, respectively. Today’s cut of 25 basis points in the 7-day reverse repo rate to 4.5% reflects the assumption that the Federal Reserve will normalize its interest rate even more gradually than previously assumed. Also, other U.S. developments like the failure to legislate a more stimulative fiscal stance and growing dissatisfaction with the Trump presidency have hurt the U.S. dollar’s prospects generally.

A released statement from Bank Indonesia cites a relatively stable rupiah, weaker-than-expected Indonesian GDP last quarter, inflation that currently is running below its 3-5% target range for 2017, and a further slowdown of bank lending growth. Finally, “to support economic funding as well as financial market deepening, Bank Indonesia with related authorities will speed up consolidation process in the banking sector while promoting credit distribution and corporate funding through financial markets. The policy, along with policy rate easing, is aimed at boosting an optimum banking intermediation to support national economic recovery.”

Bank Indonesia’s overnight deposit rate and overnight lending facility rates were also reduced by 25 basis points to 3.75% and 5.25%.

Copyright 2017, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

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