Bank Indonesia keeps interest rate unchanged
09:51, 19 August 2021
Indonesia's central bank has kept its key policy rate unchanged to help shield the local currency from market volatility as the US Federal Reserve might scale back its asset purchases before year-end, which is sooner than most market participants had anticipated.
Following the release of the Fed’s minutes of meeting overnight, the dollar index surged to as high as 93.50 – the highest level since November 2020. The Jakarta Stock Price Index (JCI) ended down 2.1%, while the rupiah fell 0.4% to 14,460 a dollar.
On Thursday (19 August), Bank Indonesia announced its decision to keep its seven-day reverse repo at record low of 3.5%, which is “consistent with the need to maintain the stability of the exchange rate and financial system on the backdrop of low inflation outlook and providing support for economic recovery”.
The Federal Reserve building in Washington, DC, USA – Photo: ShutterstockUnlike 2013’s ‘taper tantrum’
Indonesia was among the hardest-hit emerging markets when the Fed scaled back its assets purchases in 2013, with the local currency losing nearly 20% of its value against the dollar. The upcoming tapering, however, would not be as devastating, Bank Indonesia’s governor, Perry Warjiyo, said in a press conference following the policy decision.
In contrast to what happened in 2013, said Warjiyo, “The Fed’s communications have been very clear, and they don’t just do it once or twice, but frequently. “Secondly, we have a triple interventions mechanism, and are coordinating with the ministry of finance to keep our yield differentials appealing for investors.”
Putera Satria Sambijantoro, Jakarta-based economist at Bahana Sekuritas, agreed with the governor’s assessment.
Said Sambijantoro: “A tapering without tantrum can still be possible due to smaller foreign ownership in industrial development revenue (IDR) bonds (20% of total securities), lower current-account deficit (less than 1.0% of gross domestic product [GDP]) and more conservative state budget/narrower financing outlook.”
Between July and 18 August, the rupiah strengthened 0.63% against the dollar, with year-to-date depreciation at 2.24%, which was much lower compared with neighbouring Southeast Asian countries Malaysia, Philippines and Thailand, the central bank said in the statement.
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Policy for targeted sectors
The central bank maintained its 2021 growth outlook at 3.5%–4.3%, lower than government’s estimate of 3.7%–4.5%, and reiterated that monetary policy will be kept loose. To help economic recovery amid the COVID-19 outbreak, Bank Indonesia will introduce a macro-prudential measure to boost lending for targeted sectors next month.
According to Warjiyo, the policy “will target small and medium enterprises, not just the ventures, but also the stakeholders”.
“For instance, in my village, not only the farmers who can take up loans, but also the farmers group and rice mills,” he added, noting that the policy will target sectors such as “property, exports-oriented industries, agriculture and others”.