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Indonesia Monetary Policy December 2020

Indonesia: Central Bank stays put in December

At its 16–17 December monetary policy meeting, Bank Indonesia (BI) decided to leave the seven-day reverse repo rate at an all-time low of 3.75%. In addition, BI left the deposit facility and lending facility rates at 3.00% and 4.50%, respectively, and reiterated its focus on boosting liquidity, including through financing the government’s fiscal deficit.

The decision to hold was likely driven by the desire to analyze the impact of past easing, which has included 125 basis points of rate cuts in 2020 and a range of measures designed to support credit. Moreover, positive news regarding the development of several Covid-19 vaccines, and a gradually improving—albeit still muted—economic panorama at home reduced the immediate need for further rate cuts.

BI adopted a neutral stance in its accompanying statement, and did not provide explicit guidance on the future direction of monetary policy. The Bank stated that it would “direct all policy instruments towards supporting the national economic recovery, while controlling inflation as well as maintaining rupiah exchange rate stability”. Our panelists are fairly split on the outlook, although the Consensus is for a slight decline in rates next year.

Analysts at United Overseas Bank are among those who see lower rates ahead, stating:

“We keep the view that BI may cut the BI 7 Day Reverse Repo rate by another 25bps in Q1 2021 to 3.50% as growth recovery could still be uncertain and require further monetary support while fiscal disbursement remains a little bit lagged in supporting the broader pace of the economic recovery.”

However, some panelists see rates unchanged or rising next year. Analysts at ANZ are among them, commenting:

“We are not pencilling in further rate cuts, although we acknowledge another opportunistic cut cannot be ruled out should the IDR rally gain stronger momentum. Instead, we expect the central bank’s focus to be on monetary-fiscal coordination and improving monetary transmission.”

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