JAKARTA • Indonesia’s central bank left its benchmark interest rate unchanged for a second straight month, with governor Perry Warjiyo defending the bank’s independence amid proposals to change its mandate.
Bank Indonesia (BI) held the seven-day reverse repurchase rate at 4% yesterday, as expected by 27 of 29 economists in a Bloomberg survey. The other two predicted a 25 basis-point (bps) cut following 100bps of reductions so far this year already.
Policymakers are having to balance providing more stimulus against the risk of further weaken- ing the rupiah, which is already
down more than 6.6% against the dollar this year, the worst performer in Asia. The currency has recently come under pressure after a draft bill was circulated in Parliament calling for changes to the central bank that would effectively dilute its autonomy.
“BI has adopted a policy mix that’s almost entirely directed toward synergies and coordination with the government to support economic growth, in order for the economy to recover from the effects of Covid-19,” Warjiyo said at a briefing yesterday.
The president and finance minister have made clear that “monetary policy must remain credible, effective and independent”, he added. The rupiah gained 0.07% to 14,833 a dollar, while Indonesian stocks pared losses to close down 0.4%. The 10-year government bond yield was largely unchanged.
The hold decision “is first and foremost a reflection of the recent weakness in the rupiah”, said Joseph Incalcaterra, chief Asean economist at HSBC Holdings plc. Monetary expansion is set to accelerate in coming months as the central bank increases bond purchases, he said.
Aside from conventional easing, the central bank has reduced the reserve ratio requirement for banks to boost lending and begun buying bonds directly from the government to finance the widening budget deficit.
“Liquidity conditions remain ample but as BI notes, monetary expansion is largely stuck in the banking sector,” said Mitul Kotecha, senior emerging-markets strategist at TD Securities in Singapore. “As such the issue is not lower rates, but monetary transmission.”
With virus cases escalating in Indonesia, and Jakarta reimposing partial lockdown measures, the growth outlook for South-East Asia’s biggest economy is dimming. Along with subdued inflation, that could give BI space to resume rate cuts in coming months. — Bloomberg