Indonesia: BI reduces rates further – UOB

Enrico Tanuwidjaja, Economist at UOB Group, and Haris Handy, reviewed the recent decision by the Bank Indonesia (BI) to cut the benchmark rate by 25bps.

Key Quotes

“Bank Indonesia (BI) cut its benchmark rate by another 25bps to 4.00% in July 2020 monetary policy meeting (MPC), which is in line with our expectation and the consensus forecast. The move came after Indonesia posted a 1.96% y/y inflation in June (the lowest inflation in almost two decades since June 2000 at 2.04%), due to low demands caused by the restriction on economic and social activities during the COVID-19 pandemic. BI reiterated that the move is consistent with inflation forecasts which remain low, maintained external stability, and to accelerate the economic recovery amidst the negative ramifications of COVID-19. BI also lowered the Deposit Facility rate by 25bps to 3.25%, as well as the Lending Facility rate to 4.75%.”

“The policy of anchoring stability of the Rupiah exchange rate and easing liquidity (“quantitative easing”) will continue. In addition, BI will put more focus on strengthening the synergy of monetary expansion by accelerating the Government's fiscal stimulus.”

“Going forward, we still see a room for a final 25bps cut in Q4 2020, bringing the 7-day reverse repo rate to a lower level at 3.75%. On the back of a much lower domestic demand in 2Q20 (which was reflected from the record imports contraction in May at -42.2% y/y), we are revising our GDP forecast to 0.9% in 2020 (from 2.0% previously). In addition, we still expect BI to remain accommodative; ensuring the recovery in Indonesia’s domestic market and overall economy to be expedient and sustained when the pandemic concerns dissipate.”