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Indonesia central bank keeps key rate unchanged

by qualityeducation
Bank Indonesia’s logo is seen at Bank Indonesia headquarters in Jakarta, Indonesia, Jan 17, 2019. (Reuters file photo)

JAKARTA: Indonesia’s central bank kept its policy interest rate unchanged on Wednesday, prioritising market stability but loosened some lending rules to spur consumption in the pandemic-hit economy.

The decision came after Southeast Asia’s biggest economy shrank 5.32% in the second quarter, steeper than expected, and amid a rising number of coronavirus cases in the country.

Bank Indonesia (BI) kept the 7-day reverse repurchase rate at 4.00%, already the lowest since at least 2016, when it started using the rate as its benchmark, as expected by the majority of economists in a Reuters poll.

BI has trimmed the key rate four times this year, totalling 100 basis points (bps), in response to the pandemic. These have come on top of cuts totalling 100 bps in 2019 to support economic growth.

On Wednesday, the central bank removed loan downpayment requirements for purchases of environmentally-friendly vehicles, effective Oct 1, for lenders with low non-performing ratio levels. Previously, the downpayment was 5-10%.

“We believe that quantitative measures are more effective to support economic recovery. In what way? Monetary easing through the banking system,” Governor Perry Warjiyo told an online news briefing, while noting that keeping the benchmark rate unchanged would maintain an attractive spread for foreign investors.

Warjiyo said the central bank would monitor developments in the economy, the financial markets and coronavirus cases in its future monetary policy review.

BI has so far injected 651.54 trillion rupiah (1.4 trillion baht) of liquidity this year. It has also agreed with the government a 1.2 trillion baht fiscal deficit financing scheme that involves the central bank buying 872 billion baht of bonds while relinquishing interest payments.

Wisnu Wardana, an economist with Bank Danamon in Jakarta, said BI was likely done with its rate cuts for the year, with the governor’s comments signalling that policymakers were comfortable with signs of economic recovery.

Capital Economics’ Alex Holmes, however, said there could be further easing ahead, with high-frequency data suggesting the recovery had started to stall, but “provided the rupiah does not see a renewed bout of weakness”.

The rupiah, recently under pressure from global uncertainties, gained 0.5% versus the dollar, while the main stock index extended losses after the announcement.

Indonesia’s coronavirus case tally has reached 144,945, up 75% in around a month since BI’s last meeting, while 6,346 people have died from the Covid-19 disease.

The government has forecast a slight contraction or flat growth for the economy this year, but some analysts believe GDP will contract – the first time for the resource-rich country since the Asian financial crisis in 1998. 

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