Indonesia’s central bank left its benchmark interest rates steady for the second month as it carefully weighs the need to maintain exchange rate stability against global financial market uncertainty and sufficient room to lower interest rates due to mild inflationary pressure and the need to stimulate economic growth this year.
Bank Indonesia (BI) maintained its 7-day reserve repo rate at 4.50 percent, the deposit facility rate at 3.75 percent and the lending facility rate at 5.25 percent.
BI also left its key rates steady last month but it has lowered its key rates twice this year by a total of 50 basis points following cuts in February and March. Since July 2019 the rate has been cut 6 times by a total of 150 basis points.
In addition, BI has been intervening in foreign exchange markets to stabilize the rupiah, which fell sharply in March, and also been purchasing government securities in the secondary market.
Today, BI said it would be providing liquidity to the banking industry in terms of restructuring loans to micro, small and medium enterprises (MSMEs), and ultra-micro enterprises, considering implementing renumeration on required reserves for all bans, providing sharia-compliant liquidity facilities and accelerating implementation of the digital economy through collaboration between banks and finch with regard to MSME and public access.
BI noted Indonesia’s economic growth eased to an annual 2.97 percent in the first quarter of this year from 4.97 percent in the previous quarter and confirmed it was expecting lower growth this year due to the impact of the COVID-19 pandemic.
“In 2021, however, economic growth is expected to rebound on global economic gains and the positive impact of existing stimuli,” BI said.
BI has already acknowledged 2020 growth will be below its original estimate of 2.3 percent.
Indonesia’s external sector remains solid, BI said, adding the current account deficit narrowed to less than 1.5 percent of gross domestic product in the first quarter from 2.8 percent in the fourth quarter of 2019 due to declining imports from lower domestic demand.
Foreign capital inflows also began to return in April as global financial market uncertainty eased, with portfolio investment showing a net inflow of US$4.1 billion from April through May 14, helping reverse the net outflow of US$5.7 billion in the first quarter.
At the end of April, Indonesia’s reserve assets had risen to US$127.9 billion, or 7.8 months of imports and it projected a current account deficit in 2020 of less than 2.0 percent of GDP, down from an earlier forecast of 2.5 to 3.0 percent.
“The rupiah continued to regain lost value as global financial market uncertainty eased and confidence in national economic conditions was maintained,” BI said.
The rupiah plunged 17 percent from February 17 to March 24 but since then it has rebounded and rose further today to trade at 14,765 to the U.S dollar, to be down 5.7 percent this year.
Indonesia’s inflation eased to 2.67 percent in April from 2.96 percent in March, within BI’s target of 3.0 percent, plus/minus 1 percentage points.
Bank Indonesia issued the following statement:
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