Bank of Indonesia unexpectedly lowers reserve requirement ratios

The Bank of Indonesia moved unexpectedly on Tuesday to prop up economic activity without undermining its currency, amid increased speculation the US Federal Reserve will decide to hike interest rate in December.

The Asian country’s monetary authority took markets by surprise, announcing a 50 basis point reduction in banks’ reserve requirement ratios from 8.0% to 7.5%, effective 1 December.

Analysts had expected the BoI to stay put at today’s meeting.

Barclays expected the central bank to resume easing policy in the first quarter of 2016 – lowering benchmark rates by 25 basis points in the first and second quarters each - thanks to the recent move lower in the rate of price increases.

However, the broker was anticipating consumer prices would rise by 4.4% in 2016, less than the 4.7% increase projected by rate-setters in Jakarta.

“The sharp fall in the inflation trajectory back to BI’s forecast range of 3-5% in Q4 and better external balance opened up scope for further easing. However, the resurgent concerns about IDR vulnerability in the wake of looming Fed normalisation (most likely in December) has stopped BI from acting today, we believe,” Barclays’s Wai Ho Leong and Angela Hsieh said in a research report sent to clients.

“With the lingering uncertainty in the global financial market, stemming mainly from the expected Federal Funds Rate (FFR) hike as well as the diversity of monetary policies from ECB, BoJ, and PBoC, Bank Indonesia will remain vigilant in easing its monetary policy,” the central bank said in a statement issued following the decision.