MNI STATE OF PLAY: BI Seeks Balance Between Economy, Rupiah

Bank Indonesia officials will seek a way to balance a slower economy against a weakening rupiah this week, with the currency concerns making a move to further ease policy difficult.

The domestic economy is still struggling to recover from the pandemic, with GDP contracting 0.4% in the last quarter of 2020 for an annualized fall of 2.2%, leading policymakers downgrading 2021 growth estimates by 0.5% to a range of 4.3% to 5.3%.

While the economic weakness suggests more stimulus, BI's mandate is also to keep the currency stable and MNI understands the bank believes it is already undervalued by at least 10%, with the rupiah having weakened 4% already this year. But any further rate cuts, following on from the move in February, could further undermine the currency at a time when BI is intervening in markets to provide support and prevent further depreciation.

CURRENCY

The rupiah fell through the 15,000 level to the USD in May last year and declined sharply until June. Since then it has flatlined at under 15,000 and is currently at around 14,560 despite ongoing intervention by the central bank.

BI cut the benchmark rate by 25 bps to 3.5% in February, after cutting five times in 2020 for a total 125 basis points through 2020. The central bank also introduced a program of Quantitative Easing in 2020, buying USD55 billion in Government bonds on both the primary and secondary markets in a program equivalent to around 5% of GDP.

Commentators will also be looking for any view from policymakers on the ongoing government plans to push through an Omnibus Bill, which could amend the central bank's mandate, perhaps threatening its independence.

The Bank Indonesia meeting begins on Monday with the rates decision due on Tuesday.