The central bank of Indonesia (Bank Indonesia) cut its key interest rate (BI rate) by 0.25 percentage point to 6.50 percent at Thursday's policy meeting (16/06). Although the central bank had stated at its preceding policy meeting that there remained room for monetary easing, today's move was a surprise that few analysts saw coming. The 7-day reverse repurchase rate, which is set to become the central bank's new benchmark rate on 19 August, was also cut by 25 basis points (to 5.25 percent) at today's policy meeting.
Meanwhile, Bank Indonesia's deposit and lending facility rates were also cut by 0.25 percentage point to 4.50 percent and 7.00 percent, respectively.
At the start of the year the BI rate was still at 7.75 percent. However, given inflation has been under control (well within Bank Indonesia's target range of 3 - 5 percent year-on-year), the current account deficit has improved, while the rupiah has been rather stable against the US dollar, Bank Indonesia has been eagerly pushing the BI rate down since the year-start. A lower BI rate also means that there is room for accelerated economic growth. In Q1-2016 Indonesia's GDP growth was somewhat disappointing at 4.92 percent (y/y) only.
The interest rate cut of Bank Indonesia today is a brave move given that there currently exists high volatility in global financial markets ahead of the 'Brexit' referendum (scheduled for 23 June 2016) in which UK voters will decide whether or not to stay within the European Union (EU). If the United Kingdom will indeed decide to exit the EU, then there could occur a major shock in international financial markets, implying investors will turn to safe haven assets such as the US dollar, gold or the yen. Considering Bank Indonesia's prudent financial policy in recent years, it is rather surprising to see Bank Indonesia cut its BI rate amid - and possibly ahead of - severe volatility. It could also be a sign that Bank Indonesia does not believe a Brexit will occur, or - if it occurs - the impact will be relatively limited.
Meanwhile, the Federal Reserve left its monetary policy unchanged at its June policy meeting. However, statements from Federal Reserve officials (including Chairwoman Janet Yellen) indicate that a July interest rate hike is not off the table yet. As such, investors will be keen to learn the next US macroeconomic data. Another interest rate hike in the USA will also cause capital outflows from emerging markets toward the USA as yields become more attractive. Bank Indonesia's move today seemingly indicates that Indonesia's central bank is not too concerned about a US interest rate hike in July.
Meanwhile, although Indonesian inflation is under control, a recent Bank Indonesia survey showed some inflationary pressures in June, particularly due to rising food prices.