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Bank Indonesia (BI) has kept its policy rate unchanged at 3.75% as expected. The central bank remains of the view that the economy is gradually recovering. Economists at ANZ Bank are not pencilling in further rate cuts, although we acknowledge another opportunistic cut cannot be ruled out should the IDR rally gain stronger momentum. Instead, the central bank’s focus is expected to be on monetary-fiscal coordination and improving monetary transmission.

Key quotes

“The BI kept its growth forecasts unchanged at -1% to -2% for 2020 and 4.8% to 5.8% for 2020. It continues to expect inflation to be below target in 2020 before returning to the 2-4% range in 2021. On the current account deficit, the central bank expects to be below 1.5% of GDP in 2020 and be in the 1% to 2% range in 2021.”

“In its accompanying statement, BI reiterated that the IDR is still fundamentally under-valued and has the potential to strengthen further. It also emphasised an accommodative monetary policy stance and encouraged lower lending rates through supervision and coordination with the Financial Services Authority (OJK).”

“We expect monetary policy accommodation to persist until a robust recovery takes root. Economic activity remains lacklustre, though there are some signs of improvement.”

“We have not pencilled in further rate cuts. Admittedly, we cannot rule out another 25bp rate reduction should the IDR experience another significant leg of appreciation. But with BI having already lowered its policy rate by a total of 225bps in the current rate easing cycle, in tandem with the US Fed, the scope for rate cuts is now more limited. Instead, we expect the central bank’s focus to be on monetary-fiscal coordination and improving monetary transmission.”