The Indonesian central bank yesterday left its key interest rate unchanged at a record low, projecting optimism that its economy is recovering and inflation would remain tame, even with new restrictions in place to fight a surge in COVID-19 infections.
Bank Indonesia (BI) held the seven-day reverse repurchase rate at 3.75 percent, as expected by 28 of 29 economists in a Bloomberg survey. Only one predicted a 25 basis-point cut.
“This decision is consistent with an inflation estimate that’s still low and maintained external stability, as well as efforts to support economic recovery,” central bank Governor Perry Warjiyo said in announcing the decision.
Photo: Reuters
The rupiah was up 0.3 percent to 14,000 per US dollar after the decision.
The benchmark 10-year Indonesian government bond yield dropped 3 basis points to 6.26 percent.
Southeast Asia’s largest economy last week started a mass COVID-19 vaccination program, a key step in helping the economy emerge from recession and bring growth back toward the government’s 5 percent target for this year.
Warjiyo said that the economy should grow 4.8 to 5.8 percent this year, with inflation remaining within the 2 to 4 percent target range.
The central bank would continue its accommodative macroprudential policy, he said.
“We believe BI will remain open to easing policy further in the near term should inflation remain subdued, with rupiah stability likely the main decision point with Warjiyo hoping to help support the economic recovery,” said Nicholas Mapa, a senior economist at ING Bank in Manila.
The decision underscores the bank’s efforts to stabilize the currency and prices, as the country nears 1 million total COVID-19 cases.
The rupiah has lost 1 percent against the US dollar since Jan. 4, as a surge in infections and deaths prompted stricter curbs on movement in Java and Bali.
The government said that the curbs would be extended for an additional two weeks.
Indonesia’s current-account deficit, a chronic vulnerability, has in the past few months become less of a concern for policymakers.
Warjiyo said that the gap was likely less than 0.5 percent of GDP last year, and would stay between 1 to 2 percent of GDP this year.
Warjiyo said that US President Joe Biden’s policy announcements on vaccines and expanding fiscal stimuli have improved sentiment in global financial markets.
The governor expects portfolio inflows to Indonesia to rise to US$19.1 billion this year, from about US$11 billion last year.
However, bank lending remains weak, posting annual declines in each of the past three months.
Lending was down 2.41 percent year-on-year last month, Warjiyo said.
“We had thought the continual fermenting of downside risks would compel them to ease rates further, particularly when loan growth remains abysmal,” Oversea-Chinese Banking Corp economist Wellian Wiranto said. “The optics presented by economic improvement, at least in terms of data that are available, stay their hand.”
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