MNI STATE OF PLAY:Bank Indonesia Awaits Economic Rebound Signs

Indonesia's central bank meets this week looking ahead to an economic lift as key tourist destinations such as Bali reopen and is likely to keep rates steady to support the rupiah.

Southeast Asia's largest economy faces an uncertain path to recovery, however, with Bank Indonesia Governor Perry Warjiyo's recent forecast of 5% growth in the third quarter likely to fall short after the release of disappointing results from a key business activity survey last week, see: MNI STATE OF PLAY: Bank Indonesia Confident On Growth Outlook.

The economy grew by 7.07% in the second quarter, and BI's full year forecast is for growth of between 3.5% and 4.3%.

The central bank has kept the benchmark reverse repo rate steady at 3.5% this year after cutting by 150 basis points over 2020. The BI Board of Governors decision is expected late Tuesday.

SUPPORT MEASURES

BI has also purchased USD87 billion in bonds direct from the government in a programme of quantitative easing, which was increased by USD30 billion in August.

Governor Warjiyo has ruled out an interest rate hike this year, given benign domestic inflation and a moderately stable rupiah supported by strong commodity prices.

Increasing interest rates to protect the rupiah is sometimes a knee-jerk response from Indonesia to currency volatility. But the rupiah, while dipping slightly in the last month to around 14.060 to the USD, has held the important 14,000 level.

BI will be unlikely to undermine that level with another interest rate cut and is likely to wait and observe the strength of the recovery and the impact of its QE measures.

A tapering of QE is possible at some point in 2022, but this will depend on the strength of the recovery and no changes are expected this week.