Bank Indonesia keeps key interest rate on hold at 3.75 pct

The Indonesian central bank stood pat today, maintaining the policy rate at 3.75 percent. Bank Indonesia maintained its growth projections at -1 percent to -2 percent for 2020, and 4.8 percent to 5.8 percent for the next year. The central bank continues to expect inflation to remain below target this year before returning to the 2-4 percent range in 2021. Meanwhile, the current account deficit is expected to remain below 1.5 percent of GDP in 2020 and be in the 1 percent to 2 percent range in 2021.

BI stated that the IDR is still fundamentally under-valued and has the potential to strengthen further. It also emphasised an accommodative monetary policy stance and encouraged lower lending rates via supervision and coordination with the Financial Services Authority.

“Overall, we expect monetary policy accommodation to persist until a robust recovery takes root. Economic activity remains lacklustre, though there are some signs of improvement”, noted ANZ in a research report.

The manufacturing PMI returned to above the 50-level, hinting at growth. Meanwhile, consumer confidence in November rose to its highest point since March, as have car sales. There has also been a marked rise in capital goods imports, which reached a year-to-date high in November. Retail footfall in December to-date has on average risen compared to November.

“As things stand, we have not pencilled in further rate cuts. Admittedly, we cannot rule out another 25bp rate reduction should the IDR experience another significant leg of appreciation. But with BI having already lowered its policy rate by a total of 225bps in the current rate easing cycle, in tandem with the US Fed, the scope for rate cuts is now more limited. Instead, we expect the central bank’s focus to be on monetary-fiscal coordination and improving monetary transmission. Notably, despite multiple rate cuts, loan growth has struggled (-1.39 percent y/y in November)”, added ANZ.