Indonesia’s economy expanded at a slower pace last quarter than economists had forecast, a setback for the government after eight interest rate cuts in the past two years. Stocks and the currency fell.
The central bank had been cutting rates since the beginning of 2016 in a bid to spur growth in Southeast Asia’s biggest economy. While consumer spending has been sluggish, growth was supported last year by a pickup in exports, Bloomberg reported.
Financial markets have been roiled in recent weeks as higher US interest rates prompted outflows from emerging markets. That’s closed the door on further easing by Bank Indonesia and raised the prospect of the first rate hike since November 2014 as policy makers look to protect a currency trading at its lowest since January 2016.
The rupiah extended its drop to a new 28-month low of 13,978 against the dollar on Monday. Stocks retreated from a gain of as much as 1.2%.
Finance Minister Mulyani Indrawati said last week that while the weakening currency presents risks for economic growth, the government would look to sustain economic momentum by extending assistance to low income groups. The government is forecasting growth of 5.4% this year.
Consumer demand continued to disappoint, with household spending rising 4.95% in the first quarter from a year earlier, little changed from the fourth quarter. Growth in government spending slowed to 2.73% from 3.81% in the fourth quarter.
“It continues the story of the previous four quarters in which consumer spending was below expectations, and means there are downside risks to the government achieving its growth target of 5.4% for 2018,” said David Sumual, the chief economist at PT Bank Central Asia.
The data complicates the central bank’s job, but Sumual expects policymakers will follow through with a rate increase later this year. Bank Indonesia is set to announce a rate decision on May 17.
“The numbers from the consumer side of things are still below expectations and that’s why the central bank might think hard about their next step,” he said.
