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Indonesia Monetary Policy May 2020

Indonesia: Central Bank keeps rates unchanged in May to support FX stability

At its 18–19 May monetary policy meeting, Bank Indonesia (BI) left the seven-day reverse repo rate at 4.50% for the second straight meeting. The Bank also left the deposit facility and lending facility rates at 3.75% and 5.25% respectively.

The Bank’s decision was motivated by a desire to ensure currency stability. While the rupiah has appreciated since the Bank’s last meeting in mid-April, the currency remains vulnerable to changes in investor sentiment due to elevated foreign holdings of rupiah-denominated debt. Moreover, in recent meetings the Bank has announced alternative measures to shore up activity, including providing credit to banks and corporates, lowering reserve requirements and purchasing government bonds.

The Bank was highly dovish, stating it “acknowledges sufficient room to lower interest rates in line with mild inflationary pressures and the need to stimulate economic growth”. As such, providing downward pressure on the rupiah does not resume, rate cuts are likely later this year.

According to Goldman Sachs: “We continue to see significant room to ease policy in coming months, with another 75bp of cuts this year. However, given the continued emphasis on IDR and external stability, we recently pushed back our forecasted policy rate cuts to Q3, when policymakers will have had more time to assess risks around the IDR trajectory/global financial volatility, and the magnitude of the Q2 growth downturn will likely have become manifest”.

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