Indonesia: Central Bank cuts rates further in July to boost activity
July 16, 2020
At its 15–16 July monetary policy meeting, Bank Indonesia (BI) cut the seven-day reverse repo rate to 4.00%. The Bank also reduced the deposit facility and lending facility rates to 3.25% and 4.75% respectively. This came soon after the Bank announced a roughly USD 40 billion scheme to help the government finance this year’s large fiscal deficit, which will see BI purchase government bonds directly and aid the government with interest payments.
The decision to cut rates was aimed at boosting economic activity. The Bank stated that the global recovery would take longer than previously estimated, while elevated Covid-19 cases are hampering the rebound at home. Moreover, price pressures are muted: Inflation fell to the lower bound of the Bank’s 2.0%–4.0% range in June, providing room to cut. While the rupiah lost value since the June meeting, a desire to protect the economy trumped concerns over currency weakness.
In its press release, Bank Indonesia adopted a more hawkish stance and, unlike at the prior meeting, no longer explicitly mentioned there being room to cut the policy rate further. This suggests a reduced likelihood of more easing going forward.
As Nomura stated: “We continue to expect BI to maintain its policy rate at 4.00% in 2020, consistent with today’s less dovish forward guidance.”
However, some panelists still see more easing. According to Goldman Sachs: “We continue to see room to ease policy in coming months, with another 25bp policy rate cut this year. […] We see risks as skewed towards further policy rate cuts than in our forecast.”
Author: Oliver Reynolds, Economist