MNI STATE OF PLAY: Pressure Off For Policy Change in Indonesia

Indonesia's central bank meets this week with no change expected to benchmark interest rates, with a return to growth and a more stable rupiah reducing the immediate pressure for policy changes in either direction.

Bank Indonesia's seven-day reverse repo rate is currently set at 3.5%, with the overnight deposit and lending facility rates at 2.75% and 4.25% respectively. BI last cut rates in February and has cut the main benchmark rate by 150 basis points over the last 18 months, see: MNI STATE OF PLAY: Bank Indonesia Holds As Pandemic Bites.

The bank's policy settings have been accommodative as the Indonesian economy has endured the pandemic lockdowns, and BI's Board of Governors will have been heartened by recently released second quarter growth of 7.07%, the first growth in more than a year.

PRESSURE EASES

The curve showing the number of fresh Covid-19 infections is also beginning to flatten, providing hope for an end to the current lockdown, although vaccination rates remain low.

BI has successively downgraded its 2021 growth forecasts down to range of between 3.5% and 4.3%, 100 basis points lower than earlier forecasts. Last week, BI Governor Perry Warjiyo told an online seminar that growth would peak in 2024-2025 after recovering from the pandemic slump.

The rupiah, which pushed beyond the 14,500 level against the USD in April, has firmed to around 14,380 this week and taken short term pressure off BI to raise rates to support the currency. Also in the bank's considerations are foreign bond holdings, held in rupiah, which also serve as an indicator of global confidence in the local economy.

The BI rate decision is due to be announced late Thursday in the Asia Pacific time zone.