Indonesia: Accommodative monetary policy to support growth

3 min
Manfred Stamer
Manfred Stamer Senior Economist for Emerging Europe and the Middle East

Last week, Bank Indonesia (BI, the central bank) cut its key policy interest rate by 25bp to 5.25% and announced a number of macroprudential lending rules to boost bank lending capacity and demand for new loans. Since inflation has remained in check (3.5% y/y in August, equal to the mid-point of BI’s 2.5%-4.5% target range) and the IDR stable (YTD +3% vs. the USD), BI is focusing on supporting growth. Although real GDP growth edged down only slightly to +5.1% y/y in H1 2019 from +5.2% in 2018 as a whole, this solid outcome was only achieved thanks to stepped-up public spending (+6.7% y/y) and a stronger slump in real imports (-7.2% y/y) than in exports (-1.9%) so that net exports made a positive contribution to overall growth in H1. We expect the export recession to continue in Q3 as nominal USD-denominated exports contracted by -7.5% y/y in July-August 2019. And we project at least one more rate cut in 2019 to prop up the economy as the global growth and trade outlook falters. Full-year GDP growth is forecast at +5% in 2019 and +4.6% in 2020.