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Indonesia Holds Rates, Pledges ‘Pro-Growth’ Policy Into 2022

·4 min read

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Indonesia’s central bank left its benchmark rate unchanged and pledged to maintain a “pro-growth” policy into next year as one of the most severe Covid outbreaks in the world puts the economy’s recovery at risk.

Bank Indonesia kept the seven-day reverse repurchase rate at 3.5% on Thursday, as all 29 analysts in a Bloomberg survey predicted, and cut its economic growth forecast for the year. The central bank has held its policy rate steady since February and recently signaled that it may not make any rate moves until at least next year.

“For 2021, all BI policies are ‘pro-growth’ to encourage growth, except for the exchange rate due to the anticipation of global financial market uncertainty,” Governor Perry Warjiyo said at a briefing in Jakarta. “Next year -- macroprudential policies, payment systems, financial-market deepening, MSMEs, Islamic-finance economy -- are all for pro-growth,” he said, using shorthand for micro, small and medium enterprises.

The decision comes as recovery prospects for Southeast Asia’s biggest economy are fading and the latest Covid-19 outbreak cripples the country’s health system. The bank now sees the economy growing 3.5%-4.3% this year -- down from earlier expectations of 4.1%-5.1% growth -- after the government imposed tighter virus curbs that put the brakes on demand and productivity improvements.

“Given the nature of the health crisis, fiscal policy will be more effective in insuring against growth risks,” said Radhika Rao, an economist at DBS Bank Ltd. “For the rest of the year, BI is likely to settle into a prolonged pause to safeguard the currency, while maintaining overall financial conditions in an accommodative gear.”

Rupiah Pressure

Concerns over the outbreak also have pressured the currency, putting the monetary authority in a more challenging position. The currency is down 3% so far this year and the sovereign bond market has seen an exit of foreign funds recently as credit-rating companies such as Moody’s Investors Service and S&P Global Ratings warn of downside risks to the economy.

The rupiah maintained Thursday’s gains after the decision, closing up 0.4% at 14,483 to the dollar. The country’s benchmark stock index jumped 1.8% on the day, the most since April.

What Bloomberg Economics Says...

Unlike Bank Indonesia, we see mounting downside risks to its new growth projections. Herd immunity appears out of reach this year, and at the current weekly pace will be out of reach this time next year. With the delta variant spreading outside of Java and Bali, virus cases may continue to climb without tighter curbs.

-- Tamara Mast Henderson, Asean economist

Warjiyo has pledged to keep rates low and ensure ample liquidity to support business sectors. The central bank may need to continuously adjust macroprudential policies to enhance policy transmission, ensuring that stimulus gets to where it’s most needed and lifts the real economy.

Other points from Thursday’s briefing:

The central bank kept its 2021 inflation outlook at 2%-4%This year’s current-account gap seen at 0.6%-1.4% of GDPEconomic growth could still come in above the midpoint of the bank’s new forecast range depending on the vaccination campaign, stimulus spending and the global recoveryWarjiyo said liquidity in banking system is very looseForecast for 2021 loan growth lowered to 4%-6%, from 5%-7% earlier, though Warjiyo said banking intermediation is starting to increase

“Going forward, Warjiyo indicated he would like to calibrate monetary policy to be ‘pro-growth,’ with the central bank monitoring the pace of economic recovery and price pressures” next year, said Nicholas Mapa, a senior economist at ING Groep NV. “This suggests that BI will likely extend its current pause deep into 2022, with the rupiah likely under pressure during bouts of risk-off.”

(Updates to add governor comment in third paragraph, analyst comments in fifth paragraph and final paragraph, and Bloomberg Economics comment in text box. An earlier version of this story was corrected to remove an erroneous net bond outflow figure.)

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