Indonesia central bank signals rates to stay at record low this year

26 May, 2021 12:00 AM printer

JAKARTA: Indonesia’s central bank kept its policy rates unchanged on Tuesday, and signalled it would leave them at a record low until at least the end of the year to support the economic recovery.

Bank Indonesia’s (BI) benchmark 7-day reverse repurchase rate was left at 3.50 per cent, where it has been since February, and as expected by economists in a Reuters poll, report agencies.

The decision came even as talk about tapering by the US Federal Reserve raised risks of capital outflows in high-yielding emerging markets.

The rupiah, under pressure in recent days, kept its nearly 0.2 per cent gain after BI’s announcement.

“We maintained the benchmark rate at 3.5 per cent, until when?... until we see signs of inflation rising, and the soonest such signs of rising inflation appear could be early next year,” Governor Perry Warjiyo said in a streamed news conference.

Annual inflation was 1.42 per cent in April, below BI’s target range, he said. If BI was to begin unwinding monetary stimulus, it would first start to absorb liquidity.

BI will focus on the transmission of its previous easing measures to accelerate the recovery from the pandemic, Warjiyo said, blaming the present credit crunch on banks being reluctant to lend due to bad debt concerns.

BI has cut rates by a total 150 basis points and injected more than US$50 billion in liquidity since the pandemic began.

Volatility in US Treasury yields and higher-than-expected US inflation remained a source of worry, Warjiyo said, but added global uncertainty had eased, praising the Federal Reserve for “transparent and consistent” communication.

Enrico Tanuwidjaja, economist with UOB, said BI’s decision was in line with his view for no change in rates this year and for gradual increases beginning in the first quarter of 2022.

“If the Fed indicates there will be a sooner-than-expected rate hike, I think I will stick to my bet (of hikes) in Q1 next year,” he said, adding that Indonesia will still maintain an attractive rate differential.

Other economists said BI would not want to raise rates too soon that could risk hurting the recovery.

Southeast Asia’s largest economy shrank for the fourth consecutive quarter in January-March, though at a much more modest pace of 0.74 per cent. GDP contracted 2 per cent last year.

Warjiyo said GDP growth in the second quarter could exceed 7 per cent, followed by 5.3 per cent growth in the third quarter. For the full-year, BI maintained its growth outlook at 4.1 per cent to 5.1 per cent.