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Indonesia Monetary Policy September 2020

Indonesia: Central Bank maintains rates for second month running in September

At its 16–17 September monetary policy meeting, Bank Indonesia (BI) decided to leave the seven-day reverse repo rate at a multi-year low of 4.00%. The Bank’s decision, which marked the second consecutive hold and was widely expected by market analysts, came against the backdrop of heightened concerns over BI’s independence from the central government.

In addition, the Bank held the deposit facility and lending facility rates at 3.25% and 4.75%, respectively. Once again, BI reiterated its focus on boosting liquidity, to accelerate the economic recovery and help the government finance this year’s burgeoning fiscal deficit. To that end, the Bank also decided to extend its policy of reduced-rate reserve requirements for banks that loan to small and medium or export-oriented businesses until end-June 2021.

The depreciation risk of the already weak rupiah against the backdrop of projected low inflation fueled the Bank’s decision to keep its policy unchanged. Weakened domestic demand has exerted downward pressure on prices and August’s reading of 1.3% marked the lowest inflation rate since May 2000, well below BI’s target band of 2.0–4.0%. In addition, in its accompanying statement, BI highlighted that the “global economy is gradually starting to rebound”, while exports continue to gain momentum; factors that provided the Bank with further reason to maintain its accommodative monetary policy stance.

The next monetary policy meeting will be held on 12–13 October.

Looking ahead, the Bank’s communiqué struck a relatively hawkish tone, as it did not explicitly mention that there was room to cut the policy rate further, and once again hinted at the Bank’s preference for other monetary policy levers.

This is a viewed shared by Euben Paracuelles and Rangga Cipta, analysts at Nomura:

“We maintain our forecast that BI will keep its policy rate at 4.00% in 2020, despite the weak growth outlook and benign inflation. As we argued before, we believe FX stability remains BI’s top priority, which it clearly emphasised in today’s decision.”

However, Sung Eun Jung, an economist at Oxford Economics, holds a different view:

“We expect one more 25bp rate cut from BI in Q4, taking the policy rate down to a new low of 3.75%, to boost weak domestic growth momentum.”

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