NH: Indonesia Cuts Rates Again, Strengthens Cooperation with Government

On September 18, NH Investment & Securities stated that the central bank of Indonesia has cut its benchmark interest rate for the third consecutive month to support economic growth, despite anti-government protests and ongoing unrest. The company predicted that a more accommodative policy stance than previously expected would continue.

Um Seojin, a researcher at NH Investment & Securities, said in the newly released report, "Indonesia (BBB): Strengthened Cooperation with the Government," that "despite increased exchange rate volatility due to recent unrest, the central bank proceeded with rate cuts for three consecutive months." The central bank of Indonesia had already lowered its benchmark rate to 4.75% as of September. Um assessed, "Even amid anti-government protests and the dismissal of Finance Minister Sri Mulyani, the central bank reduced rates to support economic growth."

AFP Yonhap News

From an economic indicators perspective, rate cuts were deemed necessary. Um pointed out that inflation has turned downward and retail sales remain low, noting, "The indicators show that the economic slowdown is ongoing." He further explained, "Although credit growth, a key indicator for the central bank, has barely rebounded, the overall level remains low. As anti-government protests continue, the pace of economic recovery is likely to be slow."

In particular, Um interpreted the latest rate cut as a sign of strengthened cooperation between the central bank and the government. He said, "The central bank has declared burden sharing with the government, promising to pay interest to the government and to purchase government bonds in the secondary market." He added, "With fiscal support from the central bank and its additional demand for government bonds, upward pressure on interest rates can be eased."

Additionally, Um noted that the monetary policy statement included the phrase, 'We will continue to strengthen synergies with the government's fiscal stimulus policy,' and assessed that "the central bank appears to be adopting a more accommodative stance than previously expected, which will support growth."

Um also commented, "Recently, the National Assembly has been discussing amendments to strengthen the central bank's support for growth, even mentioning granting the president the authority to dismiss board members. Although these discussions are still in the early stages and the impact is not yet significant, concerns about the central bank's independence are gradually increasing, so bull steepening pressure is expected to persist for the time being." He projected a weaker exchange rate.