Indonesia sees growing rate cut bets ahead of meeting next week

An increasing number of economists see a chance that Indonesia’s central bank could lower its policy rate as early as next week, sooner than the fourth quarter timeline that policymakers had signalled previously.

Bank Indonesia could cut its key BI-rate by a quarter-point to 6 per cent when it meets on September 18, just hours ahead of the Federal Reserve decision expected to deliver a monetary easing, according to separate research notes by HSBC Holdings and Societe Generale.

“We no longer believe there is merit to wait for the Fed to cut rates first, as it is anyway widely expected to follow a few hours later,” HSBC economists Pranjul Bhandari and Aayushi Chaudhary wrote on Thursday (Sep 12). To be sure, most analysts still project the BI-Rate to stay steady at 6.25 per cent this month, with only five out of 19 seeing a quarter-point cut on Sept 18 in a Bloomberg News survey.

Significant gains in the rupiah, which has climbed more than 6 per cent against the dollar this quarter, and strong foreign capital inflows are behind the growing confidence in an early rate cut. Meanwhile, signs of a weakening economy are emerging, with a gauge of manufacturing activity contracting to its lowest reading in three years in August, they said.

Yields on BI’s rupiah notes – known as SRBI and seen as an indicator of the central bank’s thinking – have eased since July. The yield on six month notes dropped below 7 per cent for the first time since April at Friday’s auction.

A slip in onshore consumer sentiment and hiring intentions has softened outlook for price pressures, said Tamara Mast Henderson, an economist at Bloomberg Economics, who advanced her forecast for a BI rate cut from a prior October outlook after the latest benign inflation data last week. HSBC estimates Indonesia’s headline inflation to average even lower at 1.8 per cent in the fourth quarter. 

“With a stronger currency, ample foreign exchange reserves, and sharply lower inflation, BI should be able to focus more on supporting growth, which is currently modest at best,” Kunal Kundu, an economist at SocGen wrote in a note. 

“The only reason BI may not cut the policy rate during its September meeting (although the probability is limited) is because it will have to announce its decision a few hours before the Fed actually does so and might not want to be caught by surprise,” Kundu said. BLOOMBERG