Indonesia: BI stayed on hold in April – UOB

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Economist at UOB Group Enrico Tanuwidjaja and Haris Handy assess the recent decision by the Bank Indonesia (BI) to leave interest rates unchanged.

Key Quotes

“Bank Indonesia (BI) kept its benchmark rate unchanged at 3.50% at its April 2021 monetary policy meeting (MPC). Consequently, BI maintained the Deposit Facility rate at 2.75%, as well as the Lending Facility rate at 4.25%. BI stated that the decision is in line with the need to maintain the stability of the exchange rate against increasing uncertainty in global financial markets amidst the inflation expectation that has remained low.”

“BI also took additional policy steps to further support national economic recovery, while optimizing the accommodative monetary policy and macroprudential policy mix.”

“During the announcement, the central bank also downgraded its growth outlook to 4.1% – 5.1% this year (down from previous forecast of 4.3% to 5.3%), which is more in line with our growth forecast of 4.0%. BI noted that the economic recovery has yet to pick up robustly due to subdued private consumption gains in line with limited public mobility.”

“Going forward, we are of the view that BI has less room to trim its benchmark rate further given the current external development. In addition, we expect import to grow significantly this year, amid vaccine rollout and flattening COVID-19 curve, and in turn, increase demand of US dollars. The stronger imports recovery is confirmed by the March imports figure development, which rose by 25.7% y/y (the fastest pace since July 2018). This will need to be balanced in the short term with the portfolio capital inflows, as such requiring adequate yield differential to remain attractively in place. We keep our BI rate forecast to remain steady at 3.50% for the rest of the year. BI will remain accommodative via other monetary, macroprudential, and liquidity-supporting measures to further support national economic recovery.”

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