Indonesia: Central Bank cuts rates in February; hints at limited room for further easing ahead
At its monetary policy meeting held on 17–18 February, Bank Indonesia (BI) decided to cut the seven-day reverse repo rate by 0.25 percentage points to a new all-time low of 3.50%. In addition, BI reduced the deposit facility and lending facility rates to 2.75% and 4.25%, respectively. Moreover, the Bank highlighted that it will strengthen the monetary operations strategy in order to address some stickiness in the transmission of its easing. Lastly, BI also introduced looser rules on lending to the automotive and property sectors in order to buttress credit demand.
The Bank’s decision to further ease its monetary policy stance was supported by a moderate inflation outlook and a stable currency, and reflected its commitment to fueling economic momentum. The BI now sees the economy expanding 4.3%–5.3% this year, down from its previous 4.8%–5.8% projection. Additionally, although the Bank considers the financial system to be solid, it also warned against potential spillover from Covid-19-related risks.
Looking ahead, BI shifted the tone of its forward guidance, suggesting that scope for further reductions is more limited. While the Bank reiterated that it “will continue to direct all policy instruments towards supporting the national economic recovery”, it highlighted the importance of “controlling inflation and maintaining rupiah exchange rate stability and financial system stability”.
Commenting on the Bank’s strategy, Nicholas Mapa, senior economist at ING, stated:
“Going forward, we now expect the Bank to pause in the near term as they monitor the recent pickup and global bond yields and what it could mean for both inflation and IDR stability in the coming months.”