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Indonesia Monetary Policy August 2020

Indonesia: Central Bank holds rates in August amid weakening rupiah, reiterates focus on boosting liquidity

At its 18–19 August monetary policy meeting, Bank Indonesia (BI) decided to leave the seven-day reverse repo rate at a multi-year low of 4.00%. It also held the deposit facility and lending facility rates at 3.25% and 4.75% respectively. The Bank reiterated its focus on boosting liquidity, including through a USD 40 billion scheme announced in early July to help the government finance this year’s large fiscal deficit.

The decision to keep policy unchanged was likely influenced by the depreciation in the rupiah since the Bank’s prior meeting in mid-July: any further rate cut would have risked exacerbating downward pressure on the currency. Moreover, BI stated that it saw “signs of improvement” in domestic activity in July, and that “the export contraction is not as severe as previously expected”. A gradually improving economic picture thus likely provided the Bank with a further reason to stay put and analyze the impact of past monetary easing before making any additional moves.

In its press release, BI reiterated July’s more hawkish guidance, and again did not explicitly mention that there was room to cut the policy rate further. This is in line with our Consensus: most panelists see rates unchanged through end-2020. That said, some continue to see some additional easing to support the economy.

Analysts at Nomura state: “We continue to expect BI to maintain its policy rate at 4.00% in 2020, consistent with today’s forward guidance and the strong policy prioritization of FX stability.”

However, Sung Eun Jung, an economist at Oxford Economics, holds a different view: “We expect—given low inflation—one more 25bp rate cut in Q3, taking the policy rate down to 3.75%.”

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