Bank Indonesia keeps monetary policy on hold, likely to cut rate in June

Bank Indonesia kept its monetary policy on hold today. However, it clearly cited that the door for future rate cuts remains open in the midst of low inflation and subdued economic activity. Today’s decision was contrary to market expectations of a rate cut of 25 basis points. BI cited risks to exchange rate stability in the midst of global uncertainty as its main reason to stand pat.

However, there was a clear indication that BI acknowledges room for cuts in 2020 given low inflation and growth worries. BI anticipates inflation to stay comfortably within the target band of 2 percent to 4 percent in 2020 and 2021.

On the growth front, Bank Indonesia is less positive, acknowledging the effect of COVID-19 on the economy will likely be severe. In the meantime, it anticipates the current account deficit to narrow below 2 percent of GDP in 2020, from earlier expectations of 2.5 percent to 3 percent. The central bank also stated that in spite of recent appreciation, the Indonesian rupiah continues to be under-valued and there is scope for further appreciation. In all, the rebounding current account position will further help underpin the IDR’s near-term performance, noted ANZ in a research report.

“Overall, we believe the recent rebound in IDR and lower volatility will provide the central bank sufficient room to re-focus on reviving growth. High frequency indictors, including consumer confidence, are showing a slump and it is only a matter of time that the central bank acts to arrest this. A rate cut in June is more likely than not”, added ANZ.