Policy rate on hold for the second consecutive month
As expected, Bank Indonesia left the 7-Day Reserve Repo Rate at 3.75% for the second consecutive month
Monetary policy stance remains accommodative, despite an upbeat tone on the economic outlook
We reiterate our expectation at a 25bp rate cut next month amid downside risk to growth due to tighter movement restrictions in Java and Bali islands
Indonesia Economic Update: Bank Indonesia Repo Rate 3.75%
7DRRR maintained at 3.75%
Bank Indonesia’s (BI) Board of Governors (BOG) decided to keep the 7-Day Reverse Repo Rate (7DRRR) at 3.75%, in line with our and market expectations. BI also maintained the deposit facility rate at 3.00% and the lending facility rate at 4.50%.
Looking ahead to ongoing GDP improvements
BI’s monetary policy statement maintained an optimistic view on the nation’s economic growth prospects, highlighting that factors such as the commencement of the national vaccination program and re-opening of productive sectors, as well as monetary and fiscal policy accommodation, should drive economic recovery in 2021. BI noted that high-frequency indicators in Dec 2020, such as trade, manufacturing PMI, retail sales expectations, and consumer confidence expectations, pointed to ongoing improvements in economic activity, albeit slightly lower than originally estimated. With the 2020 trade surplus at a nine-year high of US$21.7bn, BI projected a smaller current account deficit for 2020 at 0.5% of GDP (vs. previous projection of below 1.5% of GDP). BI maintained its official GDP projection for 2021 at 4.8%-5.8% (CGS-CIMB: +5.4%), with an inflation rate at 2-4% (CGS-CIMB: 2.6%) and CAD at 1.0-2.0% of GDP (CGS-CIMB: 1.7% of GDP).
Monetary policy stance remains accommodative
To our surprise, the impact of tighter movement restrictions (PPKM) across Java and Bali islands following a resurgence of Covid-19 cases was not addressed in BI’s statement. Nonetheless, BI Governor Perry Warjiyo guided at the press conference that the central bank will assess the economic outlook continuously, taking into account developments in the global economy, the speed of fiscal spending, and Covid-19 vaccination progress. Indonesia’s monetary policy stance remains dovish, as BI “will continue to direct all policy instruments towards supporting the national economic recovery while controlling inflation as well as maintaining rupiah exchange rate stability and financial system stability.” As we project the inflation rate will remain low and GDP growth risk is tilted to the downside, we expect a 25bp rate cut by BI to 3.50% at the next BOG meeting on 18 Feb.