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Bank Indonesia Seen on Hold as Rupiah Pressured: Decision Guide

Grace Sihombing and Claire Jiao

(Bloomberg) -- Indonesia’s central bank is set to leave its benchmark interest rate unchanged Thursday as a weak economy and concerns over the bank’s autonomy weigh on the currency.

All but two of 29 economists surveyed by Bloomberg predict Bank Indonesia Governor Perry Warjiyo and his board will keep the seven-day reverse repurchase rate unchanged at 4% for a second straight month. The central bank has reduced its policy rate by 100 basis points so far this year.

With further rate cuts likely to undermine the rupiah, the central bank may look to other measures to help support the economy. It’s already taken unconventional steps, including directly financing the government’s fiscal deficit, amid the pandemic.

“The nature of the action will be a lot more centered on quantitative easing and liquidity support, including via government bond purchases, rather than the more traditional rate cuts,” said Wellian Wiranto, an economist at Oversea-Chinese Banking Corp in Singapore.

Here’s what to look for in Thursday’s policy decision:

Bank Independence

Investors will watch keenly for any comments from Bank Indonesia about a parliamentary proposal that would give the government a larger role in the central bank’s decision-making.

The proposal includes several significant changes to the 1999 Central Bank Act, including widening the bank’s mandate from maintaining currency stability and managing inflation to supporting economic growth and jobs; adding government ministers to the interest rate-setting board; and creating a new monetary council, led by the finance minister, to coordinate policy with the government.

Bank Indonesia has agreed to buy about $27 billion of bonds directly from the government this year, presenting it as a one-off move amid the pandemic. However, concerns are mounting that the bank will need to continue financing fiscal spending, as proposed in the draft bill.

Volatile Currency

The rupiah has declined 6.6% so far this year -- including 1.9% this month -- making it the worst performer in Asia. A return this week to large-scale social distancing measures in Jakarta, amid a surge in Covid-19 infections, added to pressure on the rupiah, prompting the central bank to intensify its intervention in the currency market.

While dim growth prospects and slowing inflation warrant further policy support, Bank Indonesia will likely hold Thursday to prevent the rupiah from weakening further, said Khoon Goh, head of Asia research at Australia & New Zealand Banking Group Ltd. in Singapore.

Slow Recovery

Recent economic indicators have given mixed signals on the pace of recovery in Southeast Asia’s largest economy.

Manufacturing, consumer confidence and retail sales data have shown upticks, while exports and imports fell by more than expected in August. Prices fell month-on-month in both July and August, reflecting weak domestic demand. Inflation stood at 1.32% in August compared to a year earlier, well below the central bank’s 2%-4% target.

Finance Minister Sri Mulyani Indrawati said Tuesday the economy could suffer a more severe contraction in the third quarter than previously forecast due to the renewed social curbs in the capital. For the full year, she expects economic growth at the lower end of the government’s outlook, which ranges from 0.2% growth to a 1.1% contraction.

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