Bank Indonesia cuts rate for fourth time to four-year low to bolster growth

Bank Indonesia (BI) has cut its benchmark interest rate for the fourth time this year to bolster the recovery from the coronavirus pandemic, which has dealt a crushing blow to the country’s economy.

The central bank slashed its benchmark interest rate, the BI seven-day reverse repo rate, by 25 basis points (bps) to 4 percent, the lowest since 2016.

“This decision is consistent with low inflationary pressure, maintained external stability and the need to speed up economic recovery during the coronavirus pandemic,” BI Governor Perry Warjiyo told a live streamed press briefing after the decision on Thursday. “This decision is aimed at fully supporting economic recovery while also maintaining inflation and exchange rate stability.”

The central bank also lowered its deposit facility rate to 3.25 percent and its lending facility rate to 4.75 percent. The lower benchmark rate is expected to transmit into lower interest rates charged by banks on consumer loans, corporate loans and mortgages, as well as bond yields and other instruments.

The central bank expects the economy to have bottomed out in the second quarter and start recovering in the second half of the year, following the easing of restrictions imposed to curb the spread of the virus. The central bank expects the economy to grow by 0.9 percent at worst or 1.9 percent at best this year.

Meanwhile, the government expects the country’s gross domestic product (GDP) to have contracted by 3.8 percent in the second quarter and possibly shrink further in the third, which would mark Indonesia’s first recession since the 1998 financial crisis.

The governor reiterated the central bank’s commitment to the burden-sharing scheme with the government as part of the country’s COVID-19 response, which will see BI buy Rp 397.5 trillion (US$27.16 billion) in government bonds directly while fully bearing the interest cost.

BI will also bear the debt cost of the government’s stimulus package for small and medium enterprises (SMEs) and large businesses, estimated to generate Rp 177 trillion in debt.

“Bank Indonesia is committed to buying sovereign debt papers in the primary market through the market mechanism and private placement to fund health care, social protection and stimulus for regional administrations,” Perry went on to say.

The Finance Ministry expects the budget deficit to reach 6.34 percent of the gross domestic product (GDP) this year as it has allocated Rp 695.2 trillion to boosting the economic recovery and strengthening the healthcare system in response to the pandemic.

Meanwhile, the rupiah exchange rate slipped to a seven-week low on Thursday and has dropped more than 1 percent since late last month to 14,625 per US dollar at 3 p.m. Jakarta time.

“We maintained our view that the rupiah remains fundamentally undervalued and will strengthen further to reflect its fundamentals” in line with low inflation, a narrowed current account deficit and attractive yields compared to other economies, Perry said.

Inflation in Southeast Asia’s largest economy slumped to 1.96 percent in June from a year earlier, the lowest rate since 2000 and slightly below the central bank’s target range of 2 percent to 4 percent.

“With relatively stable external pressure and exchange rates as well as adequate reserves, we view a policy rate cut as appropriate for the central bank,” University of Indonesia Institute for Economic and Social Research (LPEM UI) economist Teuku Riefky wrote in a note.

“BI’s decision will enhance aggregate demand and could lower the cost of monetary operations needed to participate in the burden-sharing scheme with the Finance Ministry.”

A relatively stable rupiah over the last few weeks together with low inflationary pressure due to weak purchasing power justified the central bank’s latest policy move, said Bank Permata economist Josua Pardede.

“This policy rate cut will provide stimulus for the demand side and boost domestic consumption and investment, which will be key to keep Indonesia’s economy from falling into recession this year,” he told The Jakarta Post, adding that the decision would stimulate credit growth that could support economic recovery.

“Room for another policy rate cut is limited for the monetary authority now,” Josua went on to say, adding that the government must be more aggressive in spending the stimulus funds to prevent a greater economic downturn.