Indonesia central bank holds key rate steady, will focus on liquidity

Bloomberg

Indonesia’s central bank left its key interest rate unchanged for a third straight month, pledging to rely primarily on liquidity tools amid signs of a tentative recovery in Southeast Asia’s largest economy.
Bank Indonesia held the seven-day reverse repurchase rate at 3.5%, as all 29 economists in a Bloomberg survey predicted. The central bank has cut the policy rate by 150 basis points since the pandemic began last year.
“The decision is consistent with the forecast for inflation to remain low, as well as efforts to maintain rupiah exchange rate stability and accelerate economic recovery,” Governor Perry Warjiyo said in a briefing. If changes to the policy mix are needed, the bank will turn to liquidity instruments before
tinkering with rates, he added.
The rate decision comes as investors fret that fresh waves of infections could threaten recovery prospects in many Asian countries, including Indonesia. Meanwhile, the rupiah has dropped from a two-month high on May 10 amid an exit of foreign funds concerned about potential tapering by the US Federal Reserve.
The rupiah pared gains after the decision, up 0.2% at 14,328 to the dollar in Jakarta. The currency is down about 2% against dollar since the start of the year, while the benchmark stock index has entered a technical correction.
The central bank “is continuing its recent stance of focusing on getting the banks to pass on previous rate cuts, rather than undertaking new easing,” said Wellian Wiranto, an economist at Oversea-Chinese Banking Corp in Singapore. “Our baseline continues to see BI keeping its policy rate unchanged for the rest of the year.”
Indonesia has benefited from improvements in larger economies, particularly the US and China, along with a rally in commodity prices, Warjiyo said.
Indonesia is aiming to rebound this quarter after gross domestic product shrank more than expected to start the year. The central bank reiterated its forecast for 4.1%-5.1% economic growth this year.
The bank also repeated its 2%-4% inflation target for 2021. While inflation has lingered beneath that range so far, policy makers could be cautious about further rate cuts after the current-account balance slipped back into deficit in the first quarter.
That could push Warjiyo and his board to rely on macroprudential measures to spur lending and support growth. Responding to questions after the decision, Warjiyo stressed that monetary policy can be carried out not only through interest rates but also via liquidity.
Warjiyo again called on lenders to do more to lower interest rates to stoke loan demand, and said the central bank was cutting the maximum interest rate on credit cards to 1.75%, from 2%, to spur spending.
“Inflation remains well behaved, obviating the need for premature tightening, but the risk of a serious ‘taper tantrum’ episode this summer could weigh sharply on portfolio inflows, presenting fresh challenges for BI,” said Joseph Incalcaterra, chief Asean economist at HSBC Holdings Plc in Hong Kong. “Indonesia is far from being out of the woods.”