Indonesia: Central Bank maintains rates for third month running in October
October 13, 2020
At its 12–13 October monetary policy meeting, Bank Indonesia (BI) voted to leave the seven-day reverse repo rate at a multi-year low of 4.00%. The Bank’s decision marked the third consecutive hold and was widely expected by market analysts. In addition, BI held the deposit facility and lending facility rates at 3.25% and 4.75%, respectively, and reiterated its focus on boosting liquidity, including through financing the government’s fiscal deficit.
The decision to hold was likely driven by a desire to support the rupiah, which was down 5.7% year-to-date on 13 October. Moreover, the Bank highlighted that the domestic and global economies are on the mend, while fiscal support—which was stymied earlier this year by poor budget execution—has risen in recent months, reducing the need for further monetary measures. The next monetary policy meeting will be held on 18–19 November.
As in its prior meeting, BI did not provide explicit guidance on the future direction of rates, stating it “will continue to implement the follow-up policy measures required to support the national economic recovery”. Our panelists are split on the outlook: while some see further rate cuts ahead, others see rates on hold or rising slightly.
Commenting on the short-term outlook for monetary policy, analysts at Nomura note:
“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 prioritisation of FX stability.”
Economists at Goldman Sachs, however, take a different view:
“Going forward, we continue to view another 25bp cut in Q4 as more likely than not given the weak economy, subdued inflation and uncertainties around the virus, containment policies and the growth recovery.”
In related monetary news, proposed changes to the Central Bank’s mandate are currently being considered in parliament. These changes could include expanding BI’s mandate to factor in growth and jobs, allowing more permanent monetary financing of the fiscal deficit, and providing the government with greater say over policy decisions. The plans have sparked concern over the erosion of BI’s independence, and a potential subsequent rise in inflationary pressures, although the finance minister Sri Mulyani has sought to assure investors that BI’s independence will not be compromised. The possibility of the proposals becoming law is a downside risk for the rupiah.
Author: Oliver Reynolds, Economist