Bank Indonesia keeps policy rate on hold at 4 pct, likely to continue with policy accommodation

Bank Indonesia kept its key policy rate on hold at 4 percent today for the third consecutive meeting. While the IDR has regained some ground in the past week or so, the currency continues to be the region’s weakest performer year-to-date.

BI Governor Perry Warjiyo stated that the Indonesian rupiah was undervalued and that the central bank will continue to stabilize it. He also stated that the BI does not intend to implement the rule requiring exporters to convert their earnings to rupiah any time soon.

On the growth front, the governor noted that government spending and exports have rebounded. The BI expects demand to rebound in the fourth quarter on state spending. Government spending is finally showing signs of picking up after a slow start, noted ANZ in a research report.

Nevertheless, private demand continues to be sluggish, with loan growth at only 0.12 percent year-on-year in September. With the virus case counts still high, the economic outlook will continue to remain challenging even though movement restrictions are now being eased.

BI expects the headline inflation to remain below its target band of 2-4 percent for this year amidst soft demand, before returning to target in 2021. On the current account front, BI expects a surplus in the third quarter and a full-year 2020 deficit of less than 1.5 percent of GDP.

“Overall, weak growth and inflation warrants continued policy accommodation. However, there was little to suggest rate cuts are in the offing, with BI today reiterating that its focus is on strengthening coordination with the government and that quantitative measures are the most effective means to support the economic recovery”, added ANZ.