Indonesian Bank to Maintain Benchmark Rate at 6% and Implements Mix-Policy
Board of governor Bank Indonesia (BI) decided cut its 7-Day Reverse Repo Rate (BI-7DRR) 25 basis points (bps) to 4.25 percent, Deposit Facility rate to 3.50 percent, and Lending Facility rate to 5.0 percent, said the governor today (05/18) - Photo: Privacy

JAKARTA (TheInsiderStories) – Board of governor Bank Indonesia (BI) decided cut its 7-Day Reverse Repo Rate (BI-7DRR) by 25 basis points (bps) to 4.25 percent, Deposit Facility rate to 3.50 percent, and Lending Facility rate to 5.0 percent, said the governor today (05/18). The governors views the policy is consistent with efforts to maintain economic stability and encourage the recovery in the COVID-19 era.

“Going forward, Bank Indonesia will continue to see room for lower interest rates in line with low inflationary pressure, maintained external stability, and the need to boost economic growth,” said the governor, Perry Warjiyo through a video conference on Thursday.

He added, the policy of stabilizing the Rupiah and quantitative easing also will continue. The central bank also decided to provide current account services to banks that fulfill their statutory reserve requirement in Rupiah on a daily basis and an average of 1.5 percent per annum with a share calculated to receive demand deposits of 3 percent from time deposits, effective on August 1, 2020.

Warjiyo asserted, BI will strengthen the policy mix and work closely together to take further policy steps that are needed in a coordinated manner with the government and the Financial Service Agency to maintain macroeconomic stability and the financial system, as well as national economic recovery.

In this regard, the Bank is committed to funding the 2020 State Budget through the purchase of state bond from the primary market and the provision of liquidity funds for banks to smooth the credit restructuring program in support of the National Economic Recovery program.

BI also sees the economic growth is predicted to decline in the second quarter of 2020, although recent developments show that pressure has begun to ease. Exports declined inline with the global economic contraction and household consumption and investment declined in line with the impact of the large-scale social restrictions policy which reduced economic activity.

The development in May 2020 indicated that pressure on the domestic economy had begun to ease. The contraction in exports does not look as deep as previous forecasts in line with increased demand from China.

Some early indicators of domestic demand also indicate that the economy is at its lowest level and are entering a recovery phase, as reflected in cement sales, retail sales, Purchasing Manager Index, and consumer expectations that are better than the achievements of the previous month.

Bank Indonesia predicts that the economic recovery process will start to strengthen in the third quarter of 2020 in line with the relaxation of the social distancing since mid-June 2020 and the policy stimulus adopted. Indonesia’ economic growth is predicted to decline in the range of 0.9 to -1.9 percent in 2020 and will again increase in the range of 5.0 – 6.0 percent in 2021 due to the impact of global economic improvement and the stimulus policies of the government and BI.

The central bank also rated, resilience of the external sector of Indonesia’ economy in the second quarter remains good. The current account deficit is predicted to be low supported by the prospect of an improvement in the trade balance due to falling imports in line with weak domestic demand and reduced need for production inputs for export activities.

The May 2020 data shows the trade balance recorded a surplus of US$2.09 billion, improved from the condition in April which experienced a deficit of $372.1 million. In addition, foreign capital inflows also continued to be influenced by the easing of uncertainty in the global financial markets and the continued attractiveness of domestic financial assets and the favorable outlook for the Indonesian economy.

The net inflows until June 15 recorded of 7.3 billion US dollars. The position of foreign exchange reserves at the end of May 2020 also increased to $130.5 billion, equivalent to financing of 8.3 months of imports or 8.0 months of imports and payments of government foreign debt, and was above the international adequacy standard of around 3 months of imports.

Warjiyo noted, there is a tendency for the current account deficit to be lower, and it is likely to be around 1.5 percent of gross domestic products (GDP), far below the original forecast of 2.5 – 3.0 percent of GDP. Likewise, the current account deficit in 2021 is predicted to be below 2.5 – 3.0 percent of GDP.

Commenting on the exchange rate, he said, continued to strengthen as the foreign capital inflows enter the domestic financial market. Up to June 17, the Rupiah has appreciated 5.69 percent on average compared to the May’ level, although it still depreciated by 1.42 percent compared to the end of 2019.

Continuing strengthening the Rupiah is supported by easing global financial market uncertainty and the high attractiveness of domestic financial assets and sustained foreign investor confidence in the outlook for Indonesia’ economic conditions. BI views that the local currency is fundamentally undervalued so that it has the potential to continue to strengthen and be able to support domestic economic recovery.

The potential strengthening of the Rupiah is supported by a number of fundamental factors, such as low and controlled inflation, low current account deficits, competitive returns on domestic financial assets, and Indonesia’ risk premium that has begun to decline. To support the effectiveness of exchange rate policies, the policymakers continues to optimize monetary operations to ensure the operation of market mechanisms and the availability of liquidity in both the money market and the foreign exchange market.

He also reported, inflation remains low and supports economic stability. Consumer Price Index (CPI) inflation in May recorded a slight decline from 0.08 percent in April to 0.07 percent.. With these developments, the annual CPI inflation in May was recorded at 2.19 percent, down from April’ inflation of 2.67 percent.

“Going forward, Bank Indonesia consistently maintains price stability and strengthens policy coordination with the Government, both at the central and regional levels, to control inflation remains low in its target of 3.0 percent ± 1 percent in 2020 and 2021,” concluded by the governor.

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