Bank Indonesia (BI) kicked off its firstBoard of Governor meeting this year by keeping the benchmark 7-day reverse repo rate unchanged at 3.75% (KIBB: 50% probability rate cut; consensus: no change)
The Deposit Facility rate and Lending Facility rate were also maintained at 3.00% and 4.50%, respectively.
BI statement: The decision was consistent withthelow inflation, maintained external stability, and efforts to support economic recovery.
BI pledged to continue supporting the economy using all policy instruments, focusing on policy coordination towards overcoming supply and demand constraints in terms of bank lending to priority sectors. This signalled that the monetary policy stance remains accommodative and open for future easing.
Rupiah remains fundamentally undervalued
BI believes the currency to appreciate further supported by a narrow current account deficit, low and stable inflation, attractive domestic financial assets, lower risk premium, and higher global liquidity.
As of 21 January, the rupiah appreciated by 0.7% to 14,000 compared to December last year. The currency is expected to strengthen further on the back of the global vaccine rollout and economic recovery of its major trading partners.
We still pencil in another 25 bps rate cut for 2021 to boost the economic recovery
The house remains cautiously optimistic of Indonesia’s growth recovery as it continues to register a record daily rise in COVID-19 cases and deaths. This may pose a threat to economic recovery. Some parts of Indonesia have recently been placed under partial lockdown from 11 January to curb the virus spread.
While latest indicators have demonstrated some improvement, such as inflation (1.68%; Nov: 1.59%) and exports (14.6%; Nov: 9.4%), the recent spike in the number of COVID-19 cases may undermine the growth trajectory. Nonetheless, we believe the timing for another rate cut would largely depend on the rupiah’s stability.
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