TheJakartaPost
Please Update your browser
Your browser is out of date, and may not be compatible with our website. A list of the most popular web browsers can be found below.
Just click on the icons to get to the download page.
Surprise rate cut aimed at reviving economy
Bank Indonesia trimmed its benchmark seven-day reverse repo rate by 25 basis points to 3.75 percent, the lowest since the policy rate was introduced in 2016.
Change Size
I
n a surprise move, Bank Indonesia (BI) decided on Thursday to cut its benchmark interest rate for the fifth time this year to revive the shrinking economy while reiterating its commitment to maintaining accommodative monetary policy going forward.
The central bank trimmed its benchmark seven-day reverse repo rate by 25 basis points (bps) to 3.75 percent, the lowest since the policy rate was introduced in 2016, and also cut the deposit facility and lending facility rates by a quarter of a percent to 3 and 4.5 percent respectively, following its two-day policy meeting.
The move was projected by only eight of 22 economists polled by Reuters.
“This decision took into account the low inflation expectation [and] maintained external stability and further measures needed to support the national economic recovery,” BI Governor Perry Warjiyo told reporters in a virtual press briefing.
BI’s monetary policy was loose, he went on to say, as reflected not only in the low interest rate but also the liquidity expansion through quantitative easing carried out by the central bank.
“Going forward, Bank Indonesia will keep on monitoring economic and global financial market developments as well as the spread of COVID-19 and its impact on Indonesia’s economic prospects in determining further policies needed to accelerate the national economic recovery program,” Perry stressed.
The Jakarta Composite Index (JCI) gained 0.66 percent to 5,594.06 on Thursday following the decision while the rupiah weakened 0.6 percent to Rp 14,155 against the United States dollar.
Indonesia plunged into its first economic recession since the 1998 financial crisis as the economy shrank 3.49 percent in the third quarter after recording 5.32 percent contraction in the second quarter. The government expects the economy to shrink 0.6 to 1.7 percent this year.
The central bank has delivered five rate cuts worth a total of 125 bps this year to cushion the impact of the coronavirus pandemic and help boost the economy. It has also taken quantitative easing measures, including buying government bonds, cutting the reserve requirement ratio and undertaking monetary expansion.
BI has bought Rp 384.84 trillion (US$27.19 billion) worth of government bonds so far this year as part of a burden-sharing program. It has also bought an additional Rp 72.49 trillion in the primary market to help finance government spending.
The pandemic has spurred government spending and sapped tax revenue as the government earmarked Rp 695.2 trillion in stimulus to revive the economy in a move that is expected to bring the state budget deficit to over 6 percent of gross domestic product this year.
“The role of monetary policy is limited now as the weak credit demand stems from weak economic prospects,” Bank Central Asia (BCA) chief economist David Sumual told The Jakarta Post.
“The government’s fiscal stimulus should be more aggressive as it will be more effective in supporting growth compared to the monetary policy.”
Indonesia’s loan growth stagnated in September, slowing further from the 1.04 percent annual growth recorded in August as consumers grew more concerned about the country’s economic prospects.
University of Indonesia Institute for Economic and Social Research (LPEM UI) economist Teuku Riefky was of the view that the rate cut would support the economic recovery in the fourth quarter while allowing BI to keep an eye on external pressures and maintain financial sector stability.
“With inflation remaining below expectations and without any signs of upward pressure […] the rate cuts will stimulate demand and stabilize prices,” he wrote in a research note.
“The decrease in the policy rate will encourage banks to reduce their interest expense, thereby easing the lending rate and pumping liquidity into the financial market.”
BI expects inflation to fall below its lower-end target of 2 percent and the current account deficit to fall below 1.5 percent this year. Indonesia’s annual inflation rate stood at 1.44 percent in October.
Perry said the rupiah would strengthen further against the US dollar as the currency remained fundamentally undervalued.
The rupiah has gained nearly 4 percent against the dollar over the past month as foreign investors poured in $3.68 billion to Indonesia’s financial markets from October to Nov. 16 over news about Joe Biden’s win in the US election and effective vaccine development by Pfizer and BioNTech
David of BCA said the rupiah, being “too strong” over the past several weeks, may have prompted the surprise move by the central bank to cut its policy rate.
