Bank Indonesia (BI) cut the benchmark 7-dayreverse repo rate by 25 basis points (bps) to a record low of 3.50% (KIBB:25bpscut; consensus:25bps cut)at its 2nd Board of Governor meeting this year
The Deposit Facility rate and Lending Facility rate were also slashed by 25bps to 2.75% and 4.25%, respectively.
This is the sixth rate cut with a cumulative total of 150bps since the COVID-19 pandemic hit the economy almost a year ago.
BI reiterated its stance that the decision was consistent with the low inflation, maintained exchange rate stability, and efforts to support economic recovery. It would also embark on macroprudential policy measures as follows:
Relaxing down payment requirements on automotive loans/financing to a minimum of 0% for all new motor vehicles effective from 1 March 2021 until 31 December 2021.
Relaxing the Loan/Financing-to-Value ratio on housing loans/financing to a maximum of 100% on all residential property.
Slashed economic growth outlook but retain inflation projection
BI projects growth in 2021 to achieve 4.3-5.3% range (2020: -2.07%), from an initial forecast of 4.8-5.8%. The weak growth outlook was associated with a weaker-than-expected 4Q20 GDP growth (-2.19%; 3Q20: -3.49%).
Meanwhile, inflation is projected to remain under control within the 2.0-4.0% target band.
BI likely to pause monetary easing
BI signalled the room for a further rate cut is increasingly limited and that it would use other policy measures to support the economy. This includes the continuing purchase of government bonds via QE to speed up government fiscal spending, macroprudential easing and payment system digitalisation.
The house foresees that BI likely to pause on monetary easing despite weak growth outlook and stable inflation as it may want to monitor the effectiveness of other policy measures and sizeable government fiscal spending for this year. Nonetheless, we still believe that BI has ample room to cut itspolicy rate to boost economic recovery if new COVID-19 cases continue to rise and slower than expected progress of vaccine rollout.
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