Indonesia: BI signals rates to stay at record low in 2021

  • Indonesia’s central bank kept its policy rates unchanged on 25 May 21, and signalled it would leave them at a record low until at least the end of 2021 to support the economic recovery.
  • Bank Indonesia’s (BI) benchmark 7-day reverse repurchase rate was left at 3.50%, where it has been since Feb 21, and as expected by economists in a Reuters poll.
  • The decision came even as talk about tapering by the U.S. Federal Reserve raised risks of capital outflows in high-yielding emerging markets.
  • The rupiah, under pressure in recent days, kept its nearly 0.2% gain after BI’s announcement.
  • “We maintained the benchmark rate at 3.5%, until when?… until we see signs of inflation rising, and the soonest such signs of rising inflation appear could be early-2022,” Governor Perry Warjiyo said in a streamed news conference.
  • Annual inflation was 1.42% in Apr 21, 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.
  • Volatility in U.S. Treasury yields and higher-than-expected U.S. inflation remained a source of worry, Warjiyo said, but added global uncertainty had eased, praising the Federal Reserve for “transparent and consistent” communication.
  • Southeast Asia’s largest economy shrank for the fourth consecutive quarter in 1Q21, though at a much more modest pace of 0.74%. GDP contracted 2% in 2020.
  • Warjiyo said GDP growth in 2Q21 could exceed 7%, followed by 5.3% growth in the 3Q21. For the full-year, BI maintained its growth outlook at 4.1%-5.1%.
  • The governor also announced more measures to boost the recovery such as lowering the maximum credit card interest rate, measures to support lending to small and medium businesses and plans for a digital rupiah currency.

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