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Enrico Tanuwidjaja, Economist, and Haris Handy at UOB Group assessed the recent decision by the Bank Indonesia (BI) to reduce its benchmark interest rate.

Key Quotes

“Bank Indonesia (BI) cut its benchmark rate by 25bps to a record-low of 3.75% at its November 2020 monetary policy meeting (MPC), which is in line with our forecast for a rate cut in Q4 2020 but against the consensus forecast. Consequently, Bank Indonesia (BI) lowered the Deposit Facility rate to 3.00%, as well as the Lending Facility rate to 4.50%. BI stated that the decision to lower its benchmark policy rate, the BI 7-Day Reverse Repo, is underpinned by lower inflation, anchored external sector’s stability that is reflected by the stability and relatively appreciating exchange rate against the US dollar, and the continued need to support the acceleration in the pace of 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. BI keeps its emphasis on the quantitative easing through the provision of liquidity and ensures its ampleness to promote economic recovery, including BI’s support for the Government in accelerating the realization of the 2020 State Budget.”

“We keep the view that BI may cut the BI 7 Day Reverse Repo rate by another 25bps in Q1 2021 to 3.50% as growth recovery could still be at best uncertain and requiring further monetary support while fiscal disbursement remains a little bit lagged in supporting the broader pace of the economic recovery. However, this is likely to be the last rate cut for BI, bringing the BI 7 Day Reverse Repo rate to a record low level.”

“Thus, on balance, BI still has room to deliver a final rate cut in early 2021 and we opine that at 3.50% BI would strike a good balance between supporting the real economy from the monetary side while keeping yield differential adequately attractive for global investors. Going forward, we continue to expect BI to deploy other easing measures and may implement more macroprudential measures to ensure ample liquidity.”

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