Indonesia Holds Key Rate Steady, Will Focus on Liquidity

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Indonesia’s central bank left its key interest rate unchanged for a third straight month, pledging to rely primarily on liquidity tools amid signs of a tentative recovery in Southeast Asia’s largest economy.

Bank Indonesia held the seven-day reverse repurchase rate at 3.5% on Tuesday, as all 29 economists in a Bloomberg survey predicted. The central bank has cut the policy rate by 150 basis points since the pandemic began last year.

“The decision is consistent with the forecast for inflation to remain low, as well as efforts to maintain rupiah exchange rate stability and accelerate economic recovery,” Governor Perry Warjiyo said in a briefing. If changes to the policy mix are needed, the bank will turn to liquidity instruments before tinkering with rates, he added.

Indonesia Holds Key Rate Steady, Will Focus on Liquidity

The rate decision comes as investors fret that fresh waves of infections could threaten recovery prospects in many Asian countries, including Indonesia. Meanwhile, the rupiah has dropped from a two-month high on May 10 amid an exit of foreign funds concerned about potential tapering by the U.S. Federal Reserve.

What Bloomberg Economics Says...

Bank Indonesia signaled that the next move could be up or down. We see the central bank maintaining the current policy status quo through year-end, as it navigates conflicting goals of currency stability and growth support.

-- Tamara Mast Henderson, Asean economist

The rupiah pared gains after the decision, up 0.2% at 14,328 to the dollar as of 3:37 p.m. in Jakarta. The Jakarta Composite Index of shares also eased gains to 0.9%, after rising as much as 1.5% earlier.

The currency is down about 2% against the dollar since the start of the year, while the benchmark stock index has entered a technical correction.

The central bank “is continuing its recent stance of focusing on getting the banks to pass on previous rate cuts, rather than undertaking new easing,” said Wellian Wiranto, an economist at Oversea-Chinese Banking Corp. in Singapore. “Our baseline continues to see BI keeping its policy rate unchanged for the rest of the year.”

Recovery Signs

Indonesia has benefited from improvements in larger economies, particularly the U.S. and China, along with a rally in commodity prices, Warjiyo said.

Indonesia is aiming to rebound this quarter after gross domestic product shrank more than expected to start the year. The central bank reiterated its forecast Tuesday for 4.1%-5.1% economic growth this year.

The bank also repeated its 2%-4% inflation target for 2021. While inflation has lingered beneath that range so far, policy makers could be cautious about further rate cuts after the current-account balance slipped back into deficit in the first quarter.

That could push Warjiyo and his board to rely on macroprudential measures to spur lending and support growth. Responding to questions after the decision, Warjiyo stressed that monetary policy can be carried out not only through interest rates but also via liquidity.

Weak Lending

Warjiyo again called on lenders to do more to lower interest rates to stoke loan demand, and said the central bank was cutting the maximum interest rate on credit cards to 1.75%, from 2%, to spur spending.

Other points from the briefing:

  • Consumer confidence, retail sales, manufacturing and exports all suggest the recovery is picking up pace in the second quarter
  • A current-account deficit of 1%-2% of GDP is expected for this year
  • The policy interest rate will remain low as long as inflation does, with no rise in price pressures expected at least until early 2022. “Let’s see next year,” Warjiyo said
  • BI stood by its forecast for 5%-7% growth in bank lending in 2021, even as lending contracted in April for a seventh straight month
  • The central bank plans to issue a digital currency

“Inflation remains well behaved, obviating the need for premature tightening, but the risk of a serious ‘taper tantrum’ episode this summer could weigh sharply on portfolio inflows, presenting fresh challenges for BI,” said Joseph Incalcaterra, chief Asean economist at HSBC Holdings Plc in Hong Kong. “Indonesia is far from being out of the woods.”

©2021 Bloomberg L.P.

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