Bank Indonesia keeps benchmark rate at 3.5 per cent, lowers GDP growth projection

Bank Indonesia Governor Perry Warjiyo talks during a virtual press conference held after the central bank's two-day policy meeting on Jan 21. - Courtesy of Bank Indonesia/-

JAKARTA (The Jakarta Post/ANN): Bank Indonesia (BI) decided Tuesday (April 20) to maintain its benchmark interest rate at 3.5 per cent to safeguard the rupiah as uncertainty continues to haunt the global financial market.

Aside from maintaining the seven-day reverse repo rate, the central bank also held the deposit facility rate and lending facility rate at 2.75 per cent and 4.25 per cent, respectively.

“This decision is in line with the need to safeguard the stability of the rupiah’s exchange rate against the high uncertainty in the global financial market, although the inflation forecast remains low, ” BI governor Perry Warjiyo said in a virtual presser on Tuesday following a two-day monetary policy meeting.

He said the rupiah had depreciated 3.62 per cent year-to-date as of Monday but the depreciation was lower than the currencies of emerging economies such as Brazil, Turkey and Thailand.

Meanwhile, Indonesia’s inflation stood at 1.37 per cent on an annual basis in March, which is below the central bank’s targeted range of between 2 per cent and 3 per cent this year, due to relatively weak domestic consumer demand up to that month.

The rupiah has depreciated in recent months as global investors dumped emerging market assets on the back of a rally in the United States Treasury (UST) yields last month, driven by the US’ positive domestic growth outlook after President Joe Biden signed a US$1.9 trillion recovery stimulus on March 11.

However, the UST’s rally has stalled this month and the benchmark interest rate dropped to a five-week low of 1.56 per cent on April 15.

“Recent market anxiety around rising US rates has led to capital market volatility and put the rupiah on a back foot. To the extent to which currency stability is BI’s key mandate, further policy rate cuts look unlikely this year, especially given that the economy is also showing a cyclical recovery, ” said six Morgan Stanley economists in a note released on April 14.

BI has lowered the benchmark interest rate six times since last year, a 150 basis points (bps) reduction, and pursued quantitative easing policies to help stimulate Indonesia’s recovery.

The central bank also revised down its projection for the country’s GDP growth for this year to between 4.1 per cent and 5.1 per cent from between 4.3 per cent and 5.3 per cent as it expected personal spending to stay muted.

“This is related to community mobility, ” said Perry.

“We’ve seen this in the first quarter and especially in the second quarter, although there is a vaccination [campaign], there are mobility restrictions. That is what caused the growth of personal spending to be not as high as expected.”

The government recently expanded public activity restrictions to 25 provinces and extended them until May 3 to curb the spread of the virus. The government also announced a mudik (exodus) ban to limit movement around Idul Fitri, which is expected to fall on May 12.

Household spending has shown signs of recovery as it contracted by 3.61 per cent year-on-year (yoy) in October–December last year, less severe than the 4.05 per cent yoy contraction in the previous quarter, BPS data show.

Bank Mandiri economist Faisal Rachman said the country’s recovery was expected to require a mix of accommodative monetary and macroprudential policies. Therefore, the central bank will likely keep the rate at 3.5 per cent until the end of the year.

“Low policy rate is indeed required for quite some time, particularly for Indonesia’s economy, which is projected to have a gradual recovery, ” Faisal wrote in a note released on Tuesday.

“A potential pick-up in inflation and a widening current account deficit are the other reasons to limit the space for another policy rate cut this year.” - The Jakarta Post/Asia News Network

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Indonesia , economy , GDP , benchmark , interest , rate


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