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UOB Group’s Economist Enrico Tanuwidjaja and Haris Handy give their opinion on the recent interest rate decision by the Bank Indonesia (BI).

Key Quotes

“Bank Indonesia (BI) decided to leave its benchmark rate unchanged at 4.00% at its September 2020 monetary policy meeting (MPC), which is in line with consensus forecast. Consequently, Bank Indonesia (BI) maintained the Deposit Facility rate at 3.25%, as well as the Lending Facility rate at 4.75%. BI reiterated that the decision is consistent with the need to maintain exchange rate stability, with inflation expected to stay low, yet conducive to support the economic recovery.”

“BI’s macroprudential policy stance will remain accommodative, in line with its policy mix and steady coordination with the government’s policy supporting the process and progress of economic recovery and to mitigating the risk in the financial sector due to the COVID-19 outbreak.”

We keep the view that BI may cut the BI 7 Day Reverse Repo rate by another 25bps in Q4 to 3.75% as growth recovery trajectory may be slower than expected. However, this is likely to be the last rate cut for 2020, bringing the BI 7 Day Reverse Repo rate to a record low level. BI forecast GDP growth at 4.8% in 2021 while stating that current account deficit may narrow below 1.5% of GDP this year. Inflation is expected to remain within the 2-4% target for this year and next year. Going forward, we still expect BI to deploy other easing measures and may implement more macroprudential measures to ensure ample liquidity.”