MNI STATE OF PLAY: Currency Key Concern For Bank Indonesia

Bank Indonesia is wary of undermining the rupiah by cutting rates further at the upcoming policy meeting despite weaker-than-hoped growth and it stands ready to support the currency via further intervention if necessary.

That leaves little room for manoeuvre this month and the Board is expected to keep monetary policy settings unchanged.

While the Bank hopes Integrated Business Package measures announced in February in conjunction with the Ministry of Finance will improve financing conditions, taking pressure off the need for more rate cuts in future Policymakers will have been encouraged by an improved Consumer Survey in February, with the Consumer Confidence Index (IKK) up to 85.8, a slight increase from 84.9 in January 2021, the the slump in retail sales in January is still seen as a warning of how the situation can quickly deteriorate

TRANSMISSION

Bank Indonesia is keen to encourage banks to lower lending rates to help consumers and is concerned that rate cuts have still to feed through to the real economy after it cut its benchmark 25 basis points to a historic low of 3.5% in February. It has also in recent weeks intervened in forex markets to support the rupiah, which MNI understands, the bank believes is still undervalued by around 10%.

The rupiah has weakened by about 3.5% against the dollar so far this year to 14,380, after recovering from a slide above 16,400 in the initial stages of the Covid panic last March.

Indonesia's economy contracted 0.4% in the last quarter of 2020 for an annualized fall of 2.2%, leading policymakers to downgrade 2021 growth estimates by 50 basis points to a range of 4.3% to 5.3%.

In addition to cutting rates, the Bank has also bought bonds equivalent to almost 5% of gross domestic product on primary and secondary markets.

The Bank's board meet Wednesday and Thursday, with the decision due at 0720GMT on March 18.