MNI STATE OF PLAY: BI Rates On Hold, To Ensure Funds Flow

Bank Indonesia keep its benchmark 7 day reverse repo rate unchanged at the record low of 3.5% Tuesday, in a move the central bank said consistent with its efforts to "maintain the stability of the rupiah," although policymakers pledged to keep liquidity flowing to ensure the economy recovers from the Covid-19 shock.

The currency has fallen more than 1.5% in recent weeks and is down over 3% so far this year, despite intervention from the central bank and the volatile rupiah along with the risk of capital outflows were a major driver behind BI's decision.

While maintaining its benchmark rate, a move widely expected, BI said it would, however, lower the maximum interest rate on credit cards from 2% to 1.75% per month "in order to support the transmission of interest rate policies."

The central bank also announced additional macroprudential measures, including expanding the banking panel for its inclusive financing and securitization programs as a way of improving the flow of funds throughout the economy, particularly to smaller businesses. These measures would "optimize the accommodative monetary and macroprudential policy mix" and accelerate the digitization of the payments system to further the economic recovery, the bank said.

GROWTH OUTLOOK

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. The central bank also introduced a program of Quantitative Easing in 2020, buying Government bonds direct on primary and also on secondary markets.

Bank Indonesia is dealing with an economy struggling to recover from the pandemic, with GDP contracting 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%.

Inflation remains below the bank's 2-4% target level, standing at 1.42% in April.