Indonesia Set to Keep Rates Low on Bleak Outlook: Decision Guide
(Bloomberg) -- Indonesia’s central bank is expected to keep its policy rate at a record low Thursday as extended lockdown measures hamper economic recovery and unsettle the rupiah.
Bank Indonesia will likely hold its seven-day reverse repurchase rate at 3.5%, according to all 28 economists surveyed by Bloomberg. It would be the sixth straight meeting that the central bank has stood pat as it affirms a “pro-growth” stance to keep monetary policy settings loose through next year as the economy regains steadier footing.
Indonesia exited recession in the second quarter, but the return of partial lockdowns across the country have cast a pall over recovery prospects in the latter half of this year. That is adding to selling pressures on the currency that’s already beset by foreign outflows on expectations the U.S. central bank will consider tightening policy soon.
“With social-distancing measures still weighing on economic activity, we think the central bank will likely aim to keep its policy levers at ‘pro-growth’ settings. However, further rate cuts are unlikely while the U.S. Federal Reserve’s Federal Open Market Committee continues to evince a more hawkish tone,” economists at Barclays Bank Plc said.
Here’s what to look out for in Thursday’s decision:
At its July rates meeting, Bank Indonesia slashed this year’s gross domestic product forecast to 3.5%-4.3% growth. However, that assumed lockdown measures would last for a month; most curbs have since been extended to August 23, which means they’d last about seven weeks.
The stay-at-home orders have hit mobility, consumption and non-essential business operations. Consumer confidence nosedived in July, while retail sales are expected to decline. Manufacturing activity saw its first contraction in nine months.
The impact will likely be felt until this month, as the number of districts covered by lockdown measures account for about 58% of Indonesia’s GDP, according to Euben Paracuelles, chief Asean economist at Nomura Holdings Inc. He estimates 2021 GDP growth could settle at 3.2%, well below central bank projections.
While external risks to the rupiah keep rate cuts off the table, Nomura’s Paracuelles expects Bank Indonesia “to sound dovish, reiterating that all other instruments will be pro-growth, including more fiscal financing support and BI bond purchases.”
Investors will be especially keen for details on Bank Indonesia’s role in funding next year’s budget deficit, and whether it could go beyond its current function as a standby buyer of government debt in the primary market. So far this year, the bank had bought 124 trillion rupiah ($8.6 billion) of bonds through July 19.
Finance Minister Sri Mulyani Indrawati said Monday the government would keep coordinating with the central bank to meet its financing needs next year, adding that the arrangement has worked “very well” and been “credible.” The government wants to sustain stimulus for Southeast Asia’s largest economy next year, while at the same time curb a budget deficit expected to reach 868 trillion rupiah, or 4.85% of GDP. It aims to cut the shortfall back to the statutory limit of 3% by 2023.
The rupiah is trading at an average of 14,375 to the dollar this month, stronger than the 14,495 in July, but has depreciated 0.4% since hitting a seven-week high Aug. 4. Bank Indonesia will want to “play it safe” and ensure the strength of the currency as stricter movement curbs look like they are here to stay, according to Mirae Asset Sekuritas Indonesia economist Anthony Kevin.
“We think that another attempt made by the central government this year to increase its influence on the decision-making and operations of BI through the proposed omnibus financial sector reform bill still poses a significant downside risk to the rupiah,” Kevin said.
The proposal, which also seeks to expand Bank Indonesia’s mandate to cover economic growth and job creation, has sparked concern among investors that it could compromise central bank autonomy even as a final draft remains under negotiation. During his annual speech to parliament Monday, President Joko Widodo stressed the need to sustain the country’s reform push, but didn’t specifically mention the bill.
©2021 Bloomberg L.P.