Enrico Tanuwidjaja, Economist at UOB Group, reviewed the latest decision by the Bank Indonesia (BI) to reduce its benchmark rate to 4.25%.
Key Quotes
“Bank Indonesia (BI) cut its benchmark rate by 25bps to 4.25% in June 2020 monetary policy meeting (MPC) as expected by the consensus forecast. The move is aimed to support the slowing economy amidst the negative ramifications from the massive outbreak of the COVID-19 that will derail the growth momentum. BI also lowered the Deposit Facility rate by 25bps to 3.50%, as well as the Lending Facility rate to 5.00%. This decision is consistent with efforts to maintain economic stability and support economic recovery from the COVID-19’s blow to the economy. Going forward, Bank Indonesia continue to see room for lower interest rates in line with low inflationary pressure, anchored external stability, and the continuous need to lend support towards economic growth recovery momentum.”
“The policy of anchoring stability of the Rupiah exchange rate and ensuring adequate liquidity in the market (“quantitative easing”) will continue. Bank Indonesia also decided to pay interest rates to banks’ reserve requirements in Rupiah (including the averaging portion) at a rate of 1.5% per annum with an eligible portion of 3% from bank’s third-party funds (DPK), effective on August 1 2020. This would inherently help to lower banks’ cost of fund. BI also lowered its growth forecast to 0.9-1.9% for 2020 from 2.3% previously while maintaining 2021 growth projection at 5.2-5.6% for 2021.”
“Bank Indonesia views that the Rupiah exchange rate is still fundamentally undervalued. The potential strengthening of the Rupiah exchange rate is supported by a number of fundamental factors, such as low inflation, much narrower current account deficits, and attractive yields on domestic financial assets, while at the same time Indonesia’s risk premium has begun to decline.”
“Based on today’s BI MPC, we continue to keep our forecast of a further 25bps rate cut in Q3 but now looking at a lower level of 4.00% by the end of 2020… Risk of our rate forecast remains on the downside, i.e. more than just one 25bps rate cut, given the lingering uncertainty going forward and also taking into account BI’s rhetoric that remains accommodative in supporting economic growth recovery well into next year and beyond.”
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