MNI STATE OF PLAY: Bank Indonesia Expected To Hold

Bank Indonesia's Board of Governors meets this week with no change expected to the historically low 3.75% official benchmark rate, although the Bank is likely to maintain an easing outlook which could include more cuts later this year.

BI cut interest rates five times in 2020 for a total of 125 basis points and introduced a program of quantitative easing, buying government bonds direct on primary markets as the central bank responded to the impact of the pandemic on the economy. The QE program so far is estimated at close to USD50 billion.

BI Governor Perry Warjiyo has said he expects the economy to rebound by as much as 5.8% over 2021 following an estimated fall of 2% over 2020, but it still needs stimulus as key indicators such as retail sales and lending to businesses remain stuck in the doldrums. Indonesia is in its first recession in two decades.

Consumer sentiment indices, however, are improving, and BI has pointed to a December increase in the national index of consumer confidence as evidence that the economy is on the path to recovery, also helped by a major coronavirus vaccine rollout which has begun this month.

DOVISH OUTLOOK

In early December, Warjiyo said BI would maintain its dovish monetary outlook and keep the benchmark rate low throughout 2021.

However, he has also said he believes the rupiah, currently trading at 14,060 against the USD, is undervalued by 10%, although he has not said how this impacts the monetary policy outlook.

The rupiah appreciated around 12% against the USD over the nine months from March 2020 and analysts expect the unit to continue to appreciate this year.

The BI Board of Governors meet on Wednesday and Thursday this week.