Indonesia Monetary Policy July 2021

Indonesia

Indonesia: Central Bank holds its ground in July

July 26, 2021

At its monetary policy meeting held on 21–22 July, Bank Indonesia (BI) decided to leave the seven-day reverse repo rate at the all-time low of 3.50%, where it has been since its meeting in February. The move was widely expected by market analysts.

The Bank’s decision to stand pat was underpinned by its commitment to help the recovery amid spiking new Covid-19 infections, which led the government to impose new restrictions which could weigh on activity in the third quarter. Against this backdrop, BI revised down its 2021 GDP growth projections from 4.1%–5.1% to 3.5%–4.3%. Meanwhile, price pressures are fairly low, with inflation easing markedly in June, providing the space to maintain a dovish stance. That said, the Bank expects the headline reading to return to and remain within the 2.0%–4.0% target range going forward.

Looking ahead, BI maintained its dovish tone in its communiqué, pledging to stick to a supportive monetary stance and reiterating its commitment to “maintain macroeconomic and financial system stability and support further economic improvement efforts.” The vast majority of FocusEconomics panelists see the seven-day reserve repo rate ending 2021 at 3.50%.

Commenting on the Bank’s strategy, Nicholas Mapa, senior economist at ING, stated:

“With the recent Covid-19 spike and the accompanying downgrade to the growth outlook, we now expect BI to be on hold for an extended period of time. […] Going forward, [Governor] Warjiyo indicated he would like to calibrate monetary policy to be 'pro-growth', with the Central Bank monitoring the pace of economic recovery and price pressures in 2022. This suggests that BI will likely extend its current pause deep into 2022, with IDR likely under pressure during bouts of risk-off.”

The Consensus is for the seven-day reserve repo rate to end 2021 at 3.49% and 2022 at 3.93%.


Author: Massimo Bassetti, Senior Economist

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Indonesia Monetary Policy Chart


Indonesia Monetary Policy July 2021

Note: BI seven-day reverse repo rate in %.
Source: Bank Indonesia (BI).


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