Indonesia’s central bank cut interest rates on Thursday, to support the economic recovery as policymakers expect inflation to remain low and the rupiah exchange rate to stabilize over the coming months.
The Board of Governors decided to cut the seven-day reverse repo rate by 25 basis points to 3.50 percent, the Bank Indonesia said. The decision was in line with economists’ expectations.
The previous change in the rate was a quarter-point reduction in November.
The deposit facility rate was lowered to 2.75 percent from 2.50 percent and the lending rate to 4.25 percent from 4.50 percent.
“This decision is consistent with the forecast for low inflation and maintained stability of the Rupiah exchange rate, as well as a follow-up step to stimulate momentum for national economic recovery,” the bank said.
The bank expects the vaccination drive against the coronavirus pandemic to boost growth in the coming months. BI lowered its growth forecast for this year to 4.3-5.3 percent from 4.8-5.8 percent predicted in December.
“We suspect further easing is likely over the coming months given the poor outlook for the economy,” Capital Economics economist Gareth Leather said.
The economy had shrunk 2.19 percent year-on-year in the fourth quarter of 2020.
Policymakers assessed that the strengthening of the Rupiah exchange rate has the potential to continue in line with its fundamentally undervalued level.
Leather said the performance of the rupiah will be a key determinant of the pace and timing of the central bank’s next move.
The Indonesian economy remains vulnerable to sudden falls in the rupiah, thanks to A high level of foreign currency debt, the economist said. That said, the currency has continued to hold up well against the US dollar during January.
“Provided this strong performance is sustained, further cuts are likely in the first half of the year,” Leather added.
The bank predicted that inflation is set to remain within the target of 3.0 percent ± 1 percent.
The central bank also announced a host of policy measures to ensure financial stability. That included a relaxation in provisions for vehicle financing and home loans, trade and investment promotion measures for the tourism and manufacturing sectors, and support measures for small businesses.
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