Indonesia Holds Key Rate on Tame Inflation, Gradual Recovery

Indonesia’s central bank left its key interest rate unchanged at a record low, projecting optimism that the economy is recovering and inflation will remain tame even with new restrictions in place to fight a surge in Covid-19 infections.

Bank Indonesia held the seven-day reverse repurchase rate at 3.75% Thursday, as expected by 28 of 29 economists in a Bloomberg survey. Only one predicted a 25 basis-point cut.

“This decision is consistent with an inflation estimate that’s still low and maintained external stability, as well as efforts to support economic recovery,” central bank Governor Perry Warjiyo said in announcing the decision.

The rupiah was up 0.3% to 14,000 per dollar after the decision. The benchmark 10-year government bond yield dropped 3 basis points to 6.26%.

Indonesia Holds Key Rate on Tame Inflation, Gradual Recovery

Southeast Asia’s largest economy kicked off a mass vaccination program last week, a key step in helping the economy emerge from recession and bring growth back toward the the government’s 5% target for this year.

What Bloomberg’s Economists Say...

“It looks like Bank Indonesia is waiting for the rupiah to stabilize before cutting the policy rate further. We think this is more likely in the second half of this year, once inoculation bottlenecks get resolved. We expect 50-75 basis points of rate cuts before year-end, irrespective of pass-through by banks to lending rates.”

-- Tamara Mast Henderson, Asean economist

Warjiyo said the economy should grow 4.8%-5.8% this year, with inflation remaining within the 2%-4% target range. The central bank will continue its accommodative macroprudential policy, he said.

“We believe BI will remain open to easing policy further in the near term should inflation remain subdued, with rupiah stability likely the main decision point with Warjiyo hoping to help support the economic recovery,” said Nicholas Mapa, a senior economist at ING Bank in Manila.

Virus Rampant

Thursday’s decision underscores the Bank Indonesia’s efforts to stabilize the currency and prices as the country nears a million total Covid-19 cases. The rupiah has lost 1% against the dollar since Jan. 4, when it tested a seven-month high, as a surge in infections and deaths prompted stricter curbs on movement in Java, its most-populous island, and holiday destination Bali.

The government said Thursday the curbs would be extended for an additional two weeks.

Indonesia’s current-account deficit, a chronic vulnerability, has recently become less of a concern for policy makers. Warjiyo said Thursday the gap was likely less than 0.5% of GDP last year, and will stay between 1%-2% of GDP this year.

Warjiyo also said new U.S. President Joe Biden’s policies on vaccines and expanding fiscal stimulus have improved sentiment in global financial markets. The governor expects portfolio inflows to Indonesia to rise to $19.1 billion this year, from about $11 billion in 2020.

Bank lending remains weak, however, posting annual declines in each of the last three months. Lending was down 2.41% year-on-year in December, Warjiyo said.

“We had thought the continual fermenting of downside risks would compel them to ease rates further, especially when loans growth remains abysmal,” said Wellian Wiranto, an economist at Oversea-Chinese Banking Corp. in Singapore. “The optics presented by economic improvement, at least in terms of data that are available, stay their hand.”

©2021 Bloomberg L.P.

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