Indonesia: Accommodative turn in monetary and fiscal policy
BI cuts rate, markets eye political and fiscal transition.
Group Research - Econs, Radhika Rao18 Sep 2024
  • Bank Indonesia kickstarted the rate easing cycle with a 25bp cut to 6% on Wednesday.
  • Receding inflation, rupiah gains, and near-certain US Fed rate cut provided the headroom.
  • Defences are stronger as foreign reserves has improved after a weak spell.
  • On the fiscal end, the 2025 draft budget outline signals fiscal prudence.
  • Despite that, fiscal deficit/GDP is likely to widen by 30-40bps, compared to pre-pandemic levels.
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Bank Indonesia: Cuts not ‘if’ but ‘when’

Bank Indonesia cut the benchmark rate by 25bp to 6.0% on Wednesday. Rate cuts were more a matter of ‘when’ not ‘if’ for the BI, as most of the pre-conditions fell into place in the past month. Domestic inflation had been on a slippery path, with August’s reading easing to 2.1% yoy on a concurrent moderation in food and non-food price pressures. Core inflation was also at a benign 2.0% yoy, similar to administered, and volatile sub-segments. The real rate buffer is amongst the widest in the region above 400bp, allowing the policymakers to take a more accommodative policy turn.

At the same time, factors that had previously been a drag on the IDR assets evened out this quarter, amidst emerging signs of fiscal prudence (discussed in the next section), rupiah appreciation, resumption in dollar inflows and a dovish US Fed. These had already strengthened our view that a dovish pivot was imminent, with our forecasted path expecting BI to follow the Fed. Recent rupiah gains and markets pricing in a near-certain cut by the US Fed, likely offered the BI the headroom to kickstart the easing cycle earlier.

2025 Budget draft signals fiscal prudence

In midst of a political transition, the outgoing government, led by President Jokowi, pointed to a continuation in fiscal prudence in the 2025 State Budget draft tabled last month. We also note that the projections might witness material changes when the new administration takes over and signs the provisions into law. Even if these targets are maintained, fiscal deficits are on average likely to widen by 30-40bp going forward vs 2017-2019 pre-pandemic levels.

We outline six takeaways from the provisional/ draft Budget.

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Radhika Rao

Senior Economist – Eurozone, India, Indonesia
[email protected]
 
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