Indonesia central bank cuts rates as virus risks mount, trims outlook

BANK INDONESIA / BI - JAKARTA. Indonesia's central bank cut its key policy interest rate on Thursday and trimmed this year's economic growth outlook, as it stepped up efforts to ward off the impact of the coronavirus outbreak.

Bank Indonesia (BI) cut the 7-day reverse repurchase rate by 25 basis points (bps) to 4.75%, the first easing in 2020 and following four cuts of 100 basis points in 2019.

The move was expected by 16 of 28 analysts in a Reuters poll, while the rest had predicted no change.

Southeast Asia's largest economy last year grew at the slowest pace since 2016, at 5.02%, held back by falling exports and soft investment amid a global economic slowdown.

Growth this year may be slower than initially expected, within a range of 5.0%-5.4%, compared to BI's previous range of 5.1%-5.5%, said Governor Perry Warjiyo, with the COVID-19 outbreak seen hurting tourism, trade and investment.

"Uncertainty is high when we measure the impact of COVID-19...therefore we say that the impact is V-shaped. (GDP growth) will fall, but then there will be recovery," Warjiyo said, adding that BI used the 2003 SARS outbreak in Hong Kong as a reference.

First-quarter GDP growth might dip to around 4.9%, but economic expansion would likely rebound to above 5% in the second half, he said.

This was based on an assumption that a drop in the number of foreign tourists would last for 6 months and tourism earnings dip by $1.3 billion, while imports decline by $700 million.

Warjiyo said BI's policy stance would remain accommodative and liquidity kept ample.

The rupiah currency barely moved after the rate cut, but it had weakened 0.6% on Thursday ahead of the policy announcement to trade at 13,760 per dollar.

The virus outbreak, which has killed more than 2,000 people mostly in China, has disrupted global supply chains, with some Chinese cities in lockdown and travels restricted.

In Indonesia, the number of booking cancellations by foreign visitors has reached tens of thousands, while some Chinese investment projects have been disrupted due to travel bans. China is Indonesia's largest trade partner and a major source of investment and foreign tourists.

"We can sense that monetary policymakers are concerned regarding the effects of COVID-19 to both Indonesian economic growth and external stability," said Wisnu Wardana, Bank Danamon's economist in Jakarta.

However, Wardana said room for further easing may be limited "without a convergence of global easing".

Brokerage Trimegah Sekuritas expects one more rate cut in the second quarter, its economist Fakhrul Fulvian said.

Consultancy Capital Economics thinks BI is unlikely to rush to make further rate cuts due to the potential impact of the virus on the rupiah, which is often volatile during capital outflows.

The governor said BI had intervened in the spot foreign exchange, domestic non-deliverable forward and bond markets during recent capital outflows related to virus fears.