Bank Indonesia resumes monetary easing

The board of governors of Indonesia’s central bank cut interest rates to 3.5%, in what the governor called a bid to stimulate an economic recovery.

The Bank Indonesia board also revised down its growth forecasts, and announced it would continue to buy government bonds from the primary market throughout 2021.

Bank Indonesia governor Perry Warjiyo called on the country’s lenders to start fully passing on rate cuts to borrowers.

Warijyo announced the board had reduced the seven-day repo rate by 25 basis points to 3.5%, in a statement published today (February 18). The board also reduced the deposit facility rate to 2.75% and the lending facility rate to 4.25%.

In a statement in Indonesian, Warijyo said the decision was consistent with the central bank’s forecast for low inflation and with exchange rate stability. It would also help stimulate momentum for a national economic recovery.

The seven-day repo rate is now at its lowest level since the central bank began using it as its policy rate in August 2016. Bank Indonesia cut rates by 125bp in 2020, making the last cut of the year in November. Warjiyo said the central bank had other tools to support the economy, including its quantitative easing programme. 

Since the beginning of 2020, Bank Indonesia has bought 750.38 trillion rupiah ($53.6 billion) through its QE programme, the governor said, and in 2020, it bought 473.42 trillion rupiah worth of government bonds from the primary market.

Nicholas Mapa, an analyst at commercial bank ING, noted that Warjiyo stressed in the press conference that room for further rate reductions was “limited”.

“The sudden shift in tone may hint at a more measured pace of rate cuts in the near term with the governor suggesting that the central bank would select the proper tool to support the recovery,” Mapa said.

When the central bank announced it was going to purchase government debt from the primary market, an official from the World Bank warned primary market purchases could undermine confidence.

Today, Warjiyo said the “synergy” of the central bank’s monetary expansion with the government’s fiscal stimulus was “further strengthened” by the purchase of government bonds through the primary market. He said the central bank would continue to buy sovereign bonds on the primary market throughout 2021.

Banks not passing on cuts, governor says

In his statement, Warjiyo stressed rate cuts needed to be passed on to borrowers. Lenders had cut their rates by only 83 basis points in 2020, to 9.7%. He said the central bank hoped lenders could accelerate the reduction of loan interest rates.

Warjiyo said the central bank would remove down payment requirements for vehicle loans for banks meeting set criteria.

The central bank will also loosen loan-to-value ratios to a maximum of 100% for banks that meet certain non-performing loan criteria, the governor said. Both rule relaxations will come into effect on March 1 and last until the end of the year.

The central bank has also lowered its own growth forecasts to 4.3–5.3% this year. In 2020, Indonesia’s economy contracted by an estimated 2.07%. This was due to weak private consumption and construction investment as a result of the pandemic, Warjiyo said. In 2019, the country recorded growth of 5%.

Warjiyo said he was confident new fiscal stimulus and the rollout of the vaccine programme would boost economic activity in the coming months. The central bank forecast inflation would remain under control and within the central bank’s target rate of 2–4%.

According to the central bank’s latest data, year-on-year CPI inflation for January 2021 was 1.55%, due to weak domestic demand.

Warjiyo noted the rupiah’s exchange rate had strengthened following an increase in foreign capital flows and stabilisation measures implemented by the central bank. He said the strengthening of the rupiah’s exchange rate could continue.

In October 2020, Indonesian lawmakers proposed making changes to the central bank law governing the central bank. The changes would put the finance minister on its rate-setting committee and allow the central bank to fund fiscal deficits.

The lawmakers also proposed expanding the central bank’s mandate to include employment and economic growth. Several economists said the changes would undermine Bank Indonesia’s independence.