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MNI INSIGHT: Bank Indonesia Is Confident On Pandemic Recovery

MNI (Sydney)
SYDNEY (MNI)

The central bank held its benchmark rate at 3.5% in the last review.

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Indonesia's central bank is becoming increasingly confident that the economy can navigate its way out of the pandemic lockdowns and into the recovery phase without any significant changes to existing monetary policy, MNI understands.

Key to the optimism is the view that Bank Indonesia, or BI, can avoid a shock from any "taper tantrum" as the Federal Reserve tightens monetary policy, although U.S. inflation has yet to gather great momentum, see: MNI STATE OF PLAY: Bank Indonesia Signals Ongoing Easy Policy.

MNI understands that BI sees the rupiah, which has travelled above the 1400 level to the USD since February, as more stable than in 2013, when foreign investors stampeded out of the local share market and the currency plummeted.

BI's benchmark interest rate was held steady at the last meeting at 3.5%, after cuts of 150 basis points last year, and there is currently little pressure for change.

Governor Perry Warjiyo has said that policy was likely to remain accommodative this year, effectively ruling out a rate rise, a view supported by the current relative stability of the currency.

With the economy opening, there is also little immediate pressure for further cuts, with the likely result that BI is likely to maintain its current settings in the expectation that the recovery will kick in and take the economy into a brighter 2022.

INFLATION, GROWTH

Adding to the positive outlook is low inflation, which printed at 1.59% in August well under the BI tolerance level of 2% to 4%.

GDP figures for the second quarter showed a return to growth of 7.07% after contracting by 0.71% in the first quarter, and while Bank Indonesia has revised its annualized growth forecast lower this year down to between 3.5% to 4.3% the bank would be satisfied with this result.

Also helping the economy has been BI's program of quantitative easing, with the bank purchasing another USD30 billion directly from the Government in August, after purchasing USD57 billion last year.

BI is aware that direct purchases may be seen as controversial, but believes the benefits of supporting the nation's economic recovery during the pandemic are necessary to prevent economic scarring.