Indonesia: Central Bank cuts rates to record low in November in bid to shore up activity
November 19, 2020
At its 18–19 November monetary policy meeting, Bank Indonesia (BI) decided to cut the seven-day reverse repo rate to an all-time low of 3.75%. In addition, BI cut the deposit facility and lending facility rates to 3.00% and 4.50%, respectively, and reiterated its focus on boosting liquidity, including through financing the government’s fiscal deficit.
The decision to cut was likely driven by the desire to support the economy, which continued to contract notably in the third quarter and appeared frail heading into Q4. In addition, inflation was well below the Bank’s 3–5% target range through October, while the substantial appreciation of the rupiah over the last month likely eased currency concerns and provided BI with greater leeway to loosen its stance.
The next meeting will be held on 16–17 December.
The Bank adopted a neutral stance, and did not provide explicit guidance on the future direction of monetary policy. That said, rates are expected to stay stable or decline slightly ahead. Further rate cuts will become more likely if the economic panorama does not improve, although a stable rupiah will be a perquisite for any easing. Economists at Nomura see rates remaining unchanged in the short term:
“We expect BI to maintain its policy rate at 3.75% in 2020, in view of its policy prioritisation of FX stability amid its quantitative easing measures and because the burden-sharing scheme is picking up speed.”
Analysts at ANZ concur:
“There was little to suggest more rate cuts are in the pipeline […], and we expect quantitative easing to remain BI’s primary tool of support.”
Analysts at United Overseas Bank, however, see another rate cut on the cards in early 2021:
“We keep the view that BI may cut the seven-day reverse repo rate by another 25bps in Q1 2021 to 3.50% as growth recovery could still be at best uncertain and requiring further monetary support while fiscal disbursement remains a little bit lagged in supporting the broader pace of the economic recovery.”
Author: Oliver Reynolds, Economist