In a report released by JP Morgan Chase analyst Nur Raisah Rasid writes that the policy focus on financial stability continues to determine the space for rate cuts.

With the current account deficit expected to widen amid an uncertain environment for capital inflow, JP Morgan expects that the policy stance will remain adaptive to the developments in the currency. 

“In that context, we revised the BI rate path earlier this week and now expect to see the central bank stand pat through 2021 from a previous forecast of a cut this quarter due to the potential volatility around the US elections,” Rasid said in the report on Thursday.

BI announced on Tuesday that it had kept its benchmark seven-day reverse repo rate at 4 percent, a rate it has maintained since July, to ensure rupiah stability. Throughout this year, the central bank has cut its rate by 100 basis points (bps) to the lowest level it has been over the past decade.

Read also: BI holds benchmark rate to safeguard rupiah, pledges further support for economy

“This decision took into account the need to maintain the stability of the rupiah exchange rate as we expect inflation to remain low,” BI Governor Perry Warjiyo said in a virtual briefing.

Foreign investors have pulled out around US$10 billion from the country’s financial markets as they dump risky assets amid market volatility. The rupiah has lost more than 6 percent of its value so far this year and traded at Rp 14,705 against the greenback as of 3 p.m. on Friday.

“We at Fitch Solutions have revised our key policy rate forecast for Indonesia from a further 25 bps cut by end-2020 to a holding pattern at 4 percent till end-2021,” Fitch Solutions Country Risk & Industry Research wrote in a report published on Wednesday.

The forecast was driven by two factors, namely: the central bank pricing in heightened uncertainties in the financial markets due to the United States elections and the central bank preference for unconventional policy tools to support the economy, including purchasing government securities from the primary market.

Going forward, global uncertainties will remain a major sentiment driving the rupiah’s movement against the dollar, analysts have said.

DBS Bank managing director and chief economist group research Taimur Baig noted several trends in global currencies that might occur as a result of the US elections.

“There are four scenarios. One, Biden wins with the Senate. Two, Biden wins without the Senate. Three, Trump wins. Four, we have a contested election,” Baig said in a virtual briefing on Thursday. “The most bearish rupiah scenario is a contested election."

He explained that in such a scenario spooked markets would drive the dollar to rally and emerging market currencies to sell out. However, a swing for Biden, wherein he wins both the presidency and the Senate, would likely lead to a stronger fiscal stimulus.

“That could probably be negative for the dollar and positive for emerging market currencies and the rupiah will probably rally in a situation like that,” Baig noted.

As BI maintained its rate at 4 percent for four months in a row, its focus has been on its quantitative easing programs.

The central bank has bought Rp 320.56 trillion ($21.73 billion) worth of government bonds so far this year as part of what is called a burden-sharing program and has bought an additional Rp 60.18 trillion in the primary market to help finance government spending.

Fitch Solutions wrote in its report, citing the central bank, that as of Oct. 9, BI had added Rp 667.6 trillion in terms of additional liquidity to the financial system, an estimate of 4.3 percent of the country’s GDP.

“BI will undertake quantitative easing measures through liquidity provisions, including BI’s support for the government to speed up budget disbursement to support economic recovery,” Perry said on Tuesday.