MNI STATE OF PLAY: Bank Indonesia To Balance Rupiah vs Growth

With the domestic economy weakened by the pandemic, Bank Indonesia will continue looking to balance the need for accommodative monetary policy against the stability of the rupiah which, although strengthening against the USD in recent weeks, remains volatile.

Bank Indonesia policymakers meet later this week, with no change expected to the benchmark 7 day reverse repo rate, which has sat a record low of 3.5% since February. Interest rates held at the current level will see a continuation of accommodative monetary policy, while not undermining the rupiah. The currency has strengthened in recent weeks to around 14,190 to the USD -- close to its level going into 2021.

Some of this pick up for the Indonesian currency is due to the USD weakness, but also to ongoing intervention by BI to support the currency.

The central bank's current strategy is to maintain international confidence in the rupiah while using domestic measures, such as the May move to cut interest rates on credit cards and introduction of a digital currency, to speed up the transmission of monetary policy domestically.

OUTLOOK

The central bank has an inflation target of between 2% and 4%, and with annual inflation running at 1.68% in May it is not a majority priority at present.

BI cut the benchmark rate by 25 basis points to 3.5% in February, after cutting five times in 2020 and by 125 basis points for the year, alongside starting a program of quantitative easing, buying government bonds direct on both the primary and secondary markets.

GDP contracted by 0.74% in the first quarter of 2021, after a fall of 0.4% in the last quarter of 2020. The bank has downgraded its growth forecast for 2021 to 4.1% from the previous 5.1%.

The Board of Governors meeting begins on Wednesday, with a decision expected on Thursday.