Bank Indonesia Holds Key Rate Steady and Cuts GDP Outlook
Indonesia’s central bank left its benchmark interest rate unchanged, and cut its outlook for economic growth, as expanded mobility curbs limit consumption and foreign outflows pressure the currency.
Bank Indonesia kept the seven-day reverse repurchase rate at a record low of 3.5% on Tuesday, as expected by all 35 economists surveyed by Bloomberg. The central bank also said it now forecasts gross domestic product to expand 4.1%-5.1% this year, down from 4.3%-5.3% previously.
While the decision to stand pat was widely expected, “it has been adopted with currency stability in mind, in the midst of the still-unsettled global yield environment,” said Wellian Wiranto, an economist at Oversea-Chinese Banking Corp. in Singapore. “The hold has come despite the fact that, arguably, the need to support growth has gone up.”
As recoveries take hold in advanced economies, investors have fled emerging markets like Indonesia, sapping demand for its assets. The rupiah is one of Asia’s worst performing currencies so far this year, down 3.2% against the U.S. dollar despite repeated central bank interventions. As of mid-April, global funds had sold net $1.2 billion in Indonesian government securities this year.
Currency volatility has complicated Bank Indonesia’s efforts to support an economy still seeking its footing after last year, which was its worst showing in more than two decades. Inflation remains below target and the economy is expected to contract further in the first quarter, but the rise in U.S. yields leaves Indonesian monetary authorities with limited room to cut rates further.
The rupiah was up 0.3% to 14,498 per dollar after the decision. It earlier gained as much as 0.5% to 14,483 per dollar, its strongest level since March 30. The benchmark stock index pared losses to close down 0.2%.
What Bloomberg Economics Says...
“Bank Indonesia may have its hands tied on rates for some time, having to prioritize rupiah stability over growth. More recently, though, banks and the government have helped ease the central bank’s dilemma. Banks have cut borrowing costs in the last month, and the government embraced higher bond yields at its auction last week. Even so, we still believe the next move in rates will be up -- possibly before year-end if reforms that hamstring Bank Indonesia’s ability to deliver price stability are approved by parliament.
-- Tamara Mast Henderson, Asean economist
“There was little from the decision to impact on the rupiah, which Bank Indonesia continues to see as undervalued but subject to market uncertainties,” said Khoon Goh, head of Asia research at Australia & New Zealand Banking Group Ltd. “The recent pullback in the dollar has provided some respite for the rupiah, which will continue to be driven by external factors.”
Governor Perry Warjiyo and his board have cut the benchmark interest rate by 150 basis points since the beginning of 2020 amid Southeast Asia’s worst coronavirus outbreak. Much of the country remains under mobility restrictions through May 3.
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“Even though vaccines are rolling out, mobility is still limited so consumption is not recovering as fast as we projected,” Warjiyo said. “Bank Indonesia will optimize the mix of accommodative monetary and macroprudential policies and accelerate the digitization of the payment system” to support the recovery.
Officials expect Southeast Asia’s largest economy to grow as much as 7% this quarter, but so far the recovery has been tentative. Export and import growth is at multi-year highs and manufacturing is expanding, but indicators of demand such as retail sales and core inflation remain sluggish.
“The weakness of the recent data, including for industrial production and retail sales, suggest the recovery is proving slow going,” Gareth Leather, senior Asia economist for Capital Economics Ltd., said in a research note. “On the virus front, although new daily cases have dropped back recently, social distancing is likely to remain a drag on growth for some time to come.”
With consumption making up more than half of Indonesia’s economy, the government is seeking ways to help, such as covering shipping costs for online purchases during Ramadan. It’s also seeking to reopen key tourist areas such as Bali by July.
Bank Indonesia has turned to macroprudential measures to spur borrowing and encourage domestic activity. The central bank’s move in February to relax requirements for vehicle loans has helped push automotive sales to their highest level in 15 months.
Warjiyo noted that lending rates have come down in line with Bank Indonesia’s rate cuts and liquidity injections, but lending itself hasn’t responded. Bank loans contracted 4.13% in March from a year earlier, the sixth straight month of declines.
“It is evident that BI’s focus is squarely on cajoling the banks to pass on its previous rate cuts,” OCBC’s Wiranto said in a note to clients. With the recovery still sluggish, “resuscitating growth may thus need more than just guilt-tripping banks to cut their lending rates.”
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