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Jakarta Post

Bank Indonesia ‘leaves room’ for further rate cuts this year

  • Adrian Wail Akhlas

    The Jakarta Post

Jakarta   /   Wed, October 28, 2020   /   06:03 pm
Bank Indonesia ‘leaves room’ for further rate cuts this year Bank Indonesia Governor Perry Warjiyo sits at his central bank office in Jakarta. (Courtesy of Bank Indonesia/-)

Bank Indonesia (BI) still has the option to cut its benchmark interest rate further to aid the recovery of the pandemic-battered economy, after keeping its rate unchanged for four consecutive months, BI Governor Perry Warjiyo has stated.

However, the central banker said, further cuts to the seven-day reverse repo rate (7DRRR) would depend on domestic and global economic conditions as well as other indicators, such as the rupiah and external stability.

“Room remains for rate cuts amid low inflation and the need to support economic growth,” he told reporters in a press briefing on Tuesday. “BI held the benchmark rate to maintain rupiah stability amid uncertainty in the global and domestic financial markets.”

Indonesia’s annual inflation rate was 1.42 percent in September, below the lower end of the central bank’s target range of 2 percent to 4 percent. The rupiah, meanwhile, depreciated by 4.2 percent point-to-point as the coronavirus-induced uncertainty hit Indonesia’s financial markets.

BI announced earlier this month that it had decided to hold the benchmark rate at 4 percent, a rate it has maintained since July, to ensure rupiah stability, after global investors have pulled around US$10 billion out of the country’s financial markets so far this year.

Since the beginning of the year, the central bank has cut its rate by 100 basis points (bps) to the lowest level in the past decade.

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

While holding the rates, the central bank has turned to other ways to support the economy, including by buying government bonds, cutting the reserve requirement ratio and undertaking monetary expansion.

The economy is heading for its first full-year contraction since the 1998 Asian financial crisis.

Indonesia’s gross domestic product shrank by 5.32 percent year-on-year (yoy) on the second quarter as all economic activities were depressed by the COVID-19 outbreak, with economists and government officials projecting another contraction in the third quarter.

The government expects the economy to shrink by between 0.6 percent and 1.7 percent this year. It has allocated Rp 695.2 trillion ($47.4 billion) to fund the fight against COVID-19, to spur economic recovery and finance the healthcare system.

“We are committed to ensuring amble banking liquidity and [continue] to participate in funding the state budget,” Perry said earlier this year.

The governor's statement does not necessarily mean that further rate cuts are coming at the end of this year, according to Mirae Asset Sekuritas Indonesia economist Anthony Kevin, who added that the central bank may hold the benchmark rate until the second or third quarter of next year to focus in maintaining the stability of the rupiah exchange rate.

“BI may want to hold the rate in the near-term to maintain an attractive interest rate differential and the stability of the rupiah,” he told The Jakarta Post. “We think that Perry’s statement is an effort to calm the financial markets over expectations that economic recovery in 2021 may not be as strong as previously expected.”

Fitch Solutions also projects unchanged central bank interest rates until next year, as stated on its Country Risk & Industry Research report published on Wednesday.

“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,” the report reads.

The forecast was driven by factors including the central bank pricing in heightened uncertainty in the financial markets due to the United States elections. Another factor is the central bank preference for unconventional policy tools to support the economy, including purchasing government securities from the primary market.

BI has bought Rp 320.56 trillion 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.