Indonesia to Fuel Recovery With Steady Rates: Decision Guide

(Bloomberg) -- Indonesia’s central bank will likely keep its benchmark interest rate at a record low as it seeks to ensure the economic recovery is firming up.

Bank Indonesia is expected to hold its seven-day reverse repurchase rate at 3.5% on Tuesday, according to all 30 economists surveyed by Bloomberg. With inflation staying below the central bank’s 2%-4% target for the 16th straight month in September, the monetary authority has ample space to keep policy loose while waiting for the growth momentum to strengthen.

As coronavirus cases ease, Southeast Asia’s biggest economy is pursuing its most significant reopening since the start of the pandemic. The government is letting foreign tourists return to Bali island, shortening quarantine periods and allowing restaurants, cinemas and gyms to welcome customers again across most of the country.

“Still, with the recovery at an early stage, Bank Indonesia will want to maintain a ‘pro-growth’ stance,” said Krystal Tan, a Singapore-based economist at Australia & New Zealand Banking Group Ltd. “There remains a significant amount of slack in the economy, and subdued loan growth, a large informal sector and a restrained fiscal response will cap the pace of recovery in domestic demand.”

Here’s what to look out for in Tuesday’s decision:

Road to Recovery

While Indonesia’s daily Covid-19 cases and deaths have declined to the lowest since mid-2020, there’s still the risk of stop-start reopenings. With a majority of the population still unvaccinated and the holiday season coming up, another wave of infections could derail the burgeoning recovery.

Investors will be keen to hear the central bank’s growth outlook -- the latest estimate is set at 3.5%-4.3% for 2021 -- as well as its view on any scarring from when the outbreak peaked last quarter. While manufacturing activity has bounced back, consumers remained pessimistic and retail sales have been shrinking. Bank loans expanded by just about 1% in August despite falling interest rates and a raft of measures to encourage lending to households and small businesses.

Taper Jitters

Bank Indonesia will be keeping a close watch on the U.S. Federal Reserve ahead of its expected scale-down of bond purchases starting November. Governor Perry Warjiyo has sought to assure investors that Indonesia, once among the so-called “fragile five” emerging markets during the 2013 taper tantrum, is on more solid ground this time around.

Foreign reserves are at an all-time high, while the global commodity boom is widening the country’s trade surplus and helping the rupiah to become Asia’s best-performing currency in the second half of 2021, gaining 2.8% so far. The central bank also stands ready to buy bonds to avert a surge in yields.

“We think that the central bank will play it safe in order to maintain the relatively strong position of the rupiah,” according to Mirae Asset Sekuritas Indonesia economist Anthony Kevin. “Although we don’t expect any sort of sell-offs in the financial market such as the ones we witnessed in 2013, this year’s tapering might still bring short-term selling pressures.”

Inflation Expectations

Indonesia has been largely insulated from the inflationary threat sweeping across the region. As resurgent demand and supply chain blockages send commodity prices soaring, neighboring central banks are coming under pressure to tighten even if growth remains fragile.

Still, inflation will inevitably start to climb as economic activity resumes and imports increase. Planned tax hikes could also push up consumer prices, while the central bank’s massive bond-buying program will add further liquidity to the financial system. Warjiyo’s inflation expectations should provide cues on Bank Indonesia’s monetary policy going forward.

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