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Bank Indonesia to cut benchmark rate once again this year, Fitch Solutions says
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An employee arranges US dollars at a foreign currency exchange outlet in Jakarta on March 19, 2020. (Antara/Indrianto Eko Suwarso)
B
ank Indonesia (BI) is projected to cut its benchmark interest rate by 25 basis points later this year to support the Indonesian economy against the coronavirus pandemic impact, backed by sufficient foreign exchange reserves, Fitch Solutions says.
Analysts at Fitch Solutions said the central bank had had to balance its policy to support the economy while maintaining the stability of the rupiah exchange rate, which led to its latest decision to leave its benchmark interest rate, the seven-day reverse repo rate, at 4 percent on Wednesday.
However, Fitch noted the rupiah had seen a gradual depreciation against the US dollar since it recovered from a sharp depreciation in March.
“We continue to forecast one more 25 basis point rate cut to 3.75 percent at the end of this year, as BI will continue to remain partial towards providing economic support,” analysts at Fitch Solutions wrote in a note made available to The Jakarta Post.
Considering the foreign exchange reserves that still stood at US$135.1 billion in July, the highest level ever so far and worth 8.6 months of imports and debt payment, Fitch Solutions argued that BI would have sufficient reserves to support the rupiah were it to sell off sharply with the rate cut. BI has slashed its key rate by 1 percent so far this year.
Indonesia recorded an economic contraction of 5.32 percent year-on-year (yoy) in the second quarter as household spending and investment shrank.
Fitch expects the economy to shrink 1.3 percent this year.
“The weakness in inflation continues to indicate towards sluggish domestic demand that has been heavily impacted by the still rising COVID-19 caseload in the archipelago,” the Fitch Solutions note reads.
Inflation was recorded at 1.5 percent year-on-year (yoy) in July, falling further below the central bank’s target of around 2 to 4 percent. Meanwhile, the Indonesian COVID-19 case tally surpassed 149,000 on Friday, with more than 6,000 deaths.
Read also: BI to remain standby buyer for Indonesia’s government bonds in 2021
BI aims to continue to strengthen the synergy in monetary expansion with government fiscal stimulus to further support economic recovery, BI Governor Perry Warjiyo said in a press briefing on Wednesday.
The central bank and the government have agreed on a Rp 574.59 trillion ($38.8 billion) debt monetization scheme, with the central bank pledging to buy Rp 397.5 trillion in bonds at a coupon rate corresponding to BI’s benchmark interest rate of 4 percent to fund health care and the social safety net.
The central bank will then return the yield to the government in full on the day it is paid.
