Indonesia: Central Bank holds its ground in May
At its monetary policy meeting held on 24–25 May, Bank Indonesia (BI) decided to leave the seven-day reverse repo rate at the all-time low of 3.50%, where it has been since its meeting in February.
The Bank’s decision to maintain its accommodative stance was driven by its commitment to support economic momentum amid elevated new Covid-19 infections, while a desire to back the currency to prevent depreciation-fueled price pressures likely dissuaded it from further easing. After strengthening somewhat in the first half of May, the rupiah has since weakened amid rising concerns of a faster-than-expected tightening by the Fed and as the current account balance swung back into deficit in Q1.
Looking ahead, BI maintained its dovish tone in its communiqué, pledging to stick to an accommodative monetary stance and reiterating its commitment to “accommodative macroprudential policy”.
Commenting on the Bank’s strategy, Nicholas Mapa, senior economist at ING, stated:
“We expect the Central Bank to keep policy rates unchanged in the near term given the likely recurring threat of rising bond yields and depreciation pressures on the currency. Interestingly, Warjiyo did signal that BI could reverse course should inflation begin to pick up but he quickly clarified that price pressures would not likely accelerate until perhaps 2022. In the meantime, we expect the Bank to roll out additional measures to bolster bank lending via targeted initiatives to help support investment activity without resorting to additional rate cuts.”