Indonesia skyline

Indonesia Monetary Policy October 2020

Indonesia: Central Bank maintains rates for third month running in October

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.

Free sample report

Access essential information in the shortest time possible. FocusEconomics provide hundreds of consensus forecast reports from the most reputable economic research authorities in the world.
Close Left Media Arrows Left Media Circles Right Media Arrows Right Media Circles Arrow Quote Wave Address Email Telephone Man in front of screen with line chart Document with bar chart and magnifying glass Application window with bar chart Target with arrow Line Chart Stopwatch Globe with arrows Document with bar chart in front of screen Bar chart with magnifying glass and dollar sign Lightbulb Document with bookmark Laptop with download icon Calendar Icon Nav Menu Arrow Arrow Right Long Icon Arrow Right Icon Chevron Right Icon Chevron Left Icon Briefcase Icon Linkedin In Icon Full Linkedin Icon Filter Facebook Linkedin Twitter Pinterest