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Bank Indonesia holds rate to safeguard financial market stability
BI maintained Tuesday its policy rate – the seven-day reverse repo rate – at 4.5 percent.
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Bank Indonesia (BI) Governor Perry Warjiyo talks during a livestreamed press briefing in this undated photo. (Courtesy of Bank Indonesia/-)
B
ank Indonesia (BI) has decided to leave its benchmark interest rate unchanged in a move aimed at safeguarding the stability of the financial market while also ensuring there is sufficient liquidity for the country’s banking industry amid the economic impacts of the COVID-19 pandemic.
The central bank maintained Tuesday its policy rate – the seven-day reverse repo rate – at 4.5 percent. Lending and deposit rates were also kept at 5.25 and 3.75 percent, respectively.
“This decision was made by taking into account the need to maintain the stability of the rupiah exchange rate amid global market uncertainties although Bank Indonesia does see room to cut the interest rate amid low inflation and the need to boost economic growth,” BI Governor Perry Warjiyo told a livestreamed press briefing.
The government has projected this year’s economic growth to drop to 2.3 percent under a baseline scenario, from earlier an projection of 5.3 percent, and even forecasts that the economy could contract 0.4 percent as the pandemic forces people to stay at home, disrupting business activity and hitting household spending.
The central bank has trimmed the benchmark rate twice this year by a total of 50 basis points (bps) in response to the pandemic. In total, it has slashed 150 bps off the rate since it began the current easing cycle in 2019.
Bank Danamon economist Wisnu Wardana said the monetary policy stance would remain accommodative as Indonesia’s inflation-adjusted interest rate was still attractive among its peers.
“Nevertheless, the current real interest rate is in-line with our emerging market peers, cautioning any move to change its policy rate further despite room for two 25 bps cuts,” he added.
University of Indonesia Institute for Economic and Social Research (LPEM UI) economist Teuku Riefky said despite there being “adequate room” for policy rate cuts, the central bank should maintain yield differentials to anticipate the possibility of capital flight.
“A lower policy rate may induce investors to move their assets back into safe-haven countries, triggering fluctuation in the rupiah,” he wrote in a research note. “This emphasizes the need to maintain the rupiah’s stability in the short-term amid the heightened uncertainty of the pandemic.”
BI recorded a net outflow of US$5.7 billion in the first quarter as foreign investors dumped Indonesian assets. During April to May 14, however, the central bank booked $4.1 billion in net inflows.
As a result, the rupiah strengthened by 5.1 percent on average against the US dollar as of May 18 compared to at the end of April, BI data showed. However, the currency still depreciated by around 6.52 percent against the greenback compared to last year.
“The central bank views the rupiah as remaining fundamentally undervalued and thus having the potential to strengthen and support economic recovery,” Perry said.
The central bank also vowed to support the country’s economic recovery through several measures. It pledged to provide liquidity for banks that provide loan restructuring for micro, small and medium businesses in support of the government’s stimulus for such enterprises that were hit hard by the pandemic.
Around Rp 563 trillion ($38.09 billion) worth of government bonds currently held by banks could be used as underlying assets in repurchase agreements with the central bank to access more liquidity, Perry said.
Financial Services Authority (OJK) data showed earlier this month that 88 banks had provided 3.99 million debtors with loan restructuring worth Rp 336.97 trillion. It projected around 7.8 million debtors with credit worth Rp 1.1 quadrillion might apply for the facility in 110 banks.
BI also aimed to strengthen its monetary operations and sharia financial market deepening as well as boost the digital economy through collaboration between banks and financial technology (fintech) companies.
“Going forward, Bank Indonesia will continue to monitor global economic and financial market dynamics as well as COVID-19 transmission and the economic impact on Indonesia over time, while implementing the coordinated follow-up policies required with the government and Financial System Stability Committee (KSSK) to maintain macroeconomic and financial system stability and support the national economic recovery,” Perry said.
