Bank Indonesia Holds Rates as Governor Defends Independence

Indonesia’s central bank left its benchmark interest rate unchanged for a second straight month, with Governor Perry Warjiyo defending the bank’s independence amid proposals to change its mandate.

Bank Indonesia held the seven-day reverse repurchase rate at 4% on Thursday, as expected by 27 of 29 economists in a Bloomberg survey. The other two predicted a 25 basis-point cut following 100 basis points of reductions so far this year already.

Policy makers are having to balance providing more stimulus against the risk of further weakening the rupiah, which is already down more than 6.6% against the dollar this year, the worst performer in Asia. The currency has recently come under pressure after a draft bill was circulated in Parliament calling for changes to the central bank that would effectively dilute its autonomy.

“Bank Indonesia has adopted a policy mix that’s almost entirely directed toward synergies and coordination with the government to support economic growth, in order for the economy to recover from the effects of Covid-19,” Warjiyo said at a briefing Thursday. The president and finance minister have made clear that “monetary policy must remain credible, effective and independent,” he added.

Bank Indonesia Holds Rates as Governor Defends Independence

The rupiah gained 0.07% to 14,833 a dollar, while Indonesian stocks pared losses to close down 0.4%. The 10-year government bond yield was largely unchanged.

The hold decision “is first and foremost a reflection of the recent weakness in the rupiah,” said Joseph Incalcaterra, chief Asean economist at HSBC Holdings Plc. Monetary expansion is set to accelerate in coming months as the central bank increases bond purchases, he said.

Transmission Problems

Aside from conventional easing, the central bank has reduced the reserve ratio requirement for banks to boost lending and begun buying bonds directly from the government to finance the widening budget deficit.

“Liquidity conditions remain ample but as Bank Indonesia notes, monetary expansion is largely stuck in the banking sector,” said Mitul Kotecha, senior emerging-markets strategist at TD Securities in Singapore. “As such the issue is not lower rates, but monetary transmission.”

With virus cases escalating in Indonesia, and Jakarta reimposing partial lockdown measures, the growth outlook for Southeast Asia’s biggest economy is dimming. Along with subdued inflation, that could give Bank Indonesia space to resume rate cuts in coming months.

Other highlights from the central bank briefing:

  • Bank Indonesia has bought 99.08 trillion rupiah ($6.7 billion) in bonds directly from the government, of some $27 billion it has pledged to buy
  • The direct purchases of government bonds are a one-off, but the central bank is prepared to be a “standby” buyer of government bonds through next year if needed to support growth
  • Looser reserve ratio requirements on loans to micro, small and medium enterprises will be extended through June 2021
  • The current-account deficit, a perennial vulnerability for Indonesia, should narrow on stronger exports and limited import demand, remaining below 1.5% of GDP this year
  • Economic recovery depends on how quickly authorities can ease movement curbs and the government can disburse stimulus

David Sumual, chief economist of PT Bank Central Asia in Jakarta, said the window for a late-year rate cut may be narrowing. As uncertainty lingers about the global economic recovery and emerging markets continue battling virus outbreaks, foreign capital could shy away from risky assets, he said.

“With the outlook for the rupiah still in flux, BI may consider leaning more on non-rate forms of monetary easing in the coming months, particularly direct liquidity injections,” Sumual said.

©2020 Bloomberg L.P.

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