Bank Indonesia Stuns Market With Unexpected Rate Cut

Bank Indonesia Stuns Market With Unexpected Rate Cut
August 26, 2019

 

The Bank of Indonesia surprised the markets on Friday by cutting the benchmark interest rate for the second successive month in an attempt to boost economic growth amidst a worldwide slowdown. Notably, Indonesia recorded its slowest growth in two years. The USD/IDR pair, however, hardly reacted to the news. The currency pair lost 0.14% to trade at 14,210. Historically, Indonesian rupiah recorded its all-time high of 16,800 in June 1998 and a record low of 2096 in January 1994.

The central bank of Indonesia announced 25 basis points cut in the 7-day reverse repo rate to 5.50% last week. Following last month’s rate cut, 17 out of 19 economists surveyed by Reuters expected Bank Indonesia to keep the interest rate unchanged in the August policy meeting. The 25 basis points rate cut announced in July was the first one since September 2017.

While announcing the rate cut, Perry Warjiyo, Indonesia’s central bank governor, opined that there is enough room to slash interest rates further as the inflation rate for 2019 is anticipated to stay within the target range of 2.5% to 4.5%.

The central bank also slashed the deposit and lending rates by 25 basis points each to 4.75% and 6.25%, respectively. Bank Indonesia argued that the monetary policy is in line with the low inflation outlook that is below the mid-point of the target range and continues to offer impressive returns to overseas investors.

The rate cut is perceived as a pre-emptive measure to negate the effect of the global economic slowdown on economic growth. The annual economic growth rate declined to 5.05%, from 5.07% in the earlier quarter, mainly due to a fall in exports.

The central bank forecast the economic growth for 2019 to be lower than the middle of the 5% to 5.40% range before rising towards the mid-point of the 5.10% to 5.50% range in 2020. In 2018, the Indonesian economy grew by 5.17%.

The bank also predicts inflation in 2019 to be lower than the mid-point of the 3.5% (plus or minus 1%) range. For 2020, Bank Indonesia expects inflation to be within the 3.5% (plus or minus 1%) range.

Commenting on the rate cut ING economist Nicholas Mapa said: “We expect BI to monitor closely the next moves of the Fed as well as the stability of IDR before seriously considering further rate cuts in the near term.”

Central banks of several countries, including Malaysia, India, Thailand, Philippines, and South Korea have slashed rates in 2019. Further rate cuts are anticipated in these countries. Even Singapore, which has not cut rates so far, is expected to follow soon. However, the impact of rate cuts has been only moderate so far. Economists at Australian bank ANZ expect more easing to follow. In this regard, ANZ has issued the following statement: “This suggests the need for more monetary policy easing by Asian central banks to offset the tightening in financial conditions as they respond to the external environment.”

Therefore, based on the facts presented above, we can anticipate the Indonesian rupiah to weaken in the days to come.

Technically, the USD/IDR currency pair remains range-bound between 14,210 and 14,300. The stochastic RSI indicator is near the oversold region. As a result, we can expect the greenback to strengthen against the rupiah soon.

idr - technical analysis - 26th Aug 2019

Disclaimer: Any financial trading analysis offered here is our opinion and is not intended as advice or direction for investors. We cannot guarantee the success of any trades made as a consequence of this article, and we encourage traders to incorporate a strong money management strategy to limit losses when they enter the markets. Please use this article as part of your own research before formulating strategies prior to trading.

Richard W

Richard W

Richard is the guy who know everything there is about the financial industry, working in a top firm for over 15 years, he will give the lowdown on some of the biggest companies in the world


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