VIVAnews – Indonesia's central bank, Bank Indonesia, recently reduced the BI rate by 50 basis points to 8.75 percent. There are four factors that may have contributed to the government making this move.
The new rate is lower than expected 9.00 percent, according to two Citigroup analysts as cited from a press release received by VIVAnews on Wednesday, January 7.
There four factors that probably contributed to this lower benchmark policy rate.
The first factor, according to Citigroup analysts Wei Zheng Kit and Leon Hiew, is that the balance of risk has shifted more decisively towards growth.
Inflation continued to moderate in December at 11.06 percent compared to 11.68 percent in November. This was below BI’s year-end target of 11.5 to 12.5 percent.
In addition, both exports and imports contracted in November. Exports year on year rate was down 2.1 percent and imports year on year rate was down 5.1 percent.
This, according to the Citigroup analysts, point to weakness in both external and domestic demand. They deem the recent rate cuts alongside the recently announced Rp 50 trillion fiscal stimulus package as "the starts of a policy easing cycle by both BI and the government."
The second factor, according to the analysts, is the recent stability in the Rupiah, despite the 25 basis points cut last month.
This suggests that interest rate differentials are probably a less relevant factor for the Rupiah at this juncture. In fact, "this may have given BI the confidence to cut interest rates more aggressively without undermining confidence in the Rupiah," said the two analysts.
Third, the much larger fall in imports versus exports in November resulted in a widening trade surplus. "This may have also allayed concerns that the deterioration of the current account position will be a drag on the currency," said Wei Zheng Kit and Leon Hiew
The final factor suggested by the two Citigroup analysts is the strengthening FX reserves position, which rose by US$ 800 million to US$ 51billion in December.
This, according to them, further underscores the view that the most extreme pressures on the Rupiah, witnessed in October/November, have likely subsided as risk aversion may have receded, at least temporarily.
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