Indonesia central bank holds rates, favours QE to support coronavirus-hit economy

JAKARTA: Indonesia's central bank kept interest rates steady on Tuesday for a third straight meeting, saying the rupiah was "undervalued", and reiterated it would focus on quantitative easing to further support the economy.

Bank Indonesia (BI) kept the 7-day reverse repurchase rate at 4.00pc, as expected in a Reuters poll. It has delivered 100 basis points of rate cuts so far this year.

While a rise in government spending and a rebound in exports could help support the economy in near-term, the central bank said monetary policy would remain accommodative and would focus on the "quantitative channel" to stimulate growth.

Southeast Asia's largest economy is headed for its first recession in over two decades as it grapples with the fallout of the coronavirus outbreak. Indonesia has the largest COVID-19 death toll in the region.

"We see that (quantitative easing measures) are more effective to support the national economy," Governor Perry Warjiyo said in a streamed news briefing.

The BI has cut reserve requirements, loosened lending rules and made direct purchases of government bonds to fund President Joko Widodo's COVID-19 relief programmes as it tries to help the economy withstand the fallout of the pandemic.

Warjiyo said the BI had injected 667.6 trillion rupiah ($45.45 billion) of fresh liquidity into financial markets so far this year.

The rupiah barely changed after the decision, while the main stock index rose slightly.

Warjiyo said the interest rate decision was consistent with keeping the rupiah stable. The rupiah has fallen 5.4pc this year amid concerns over central bank independence, making it Asia's worst-performing emerging currency.

Analysts have said they are monitoring BI's debt monetisation operations closely particularly as parliamentary debates on amending the central bank act have raised concerns about BI's independence.

Warjiyo said the currency was "fundamentally undervalued" and saw room for it to strengthen.

He predicted Indonesia would see a current account surplus in the third quarter, which would be its first surplus since late 2011, and would help underpin the local currency.

ING analysts expected no further cuts in near-term, saying the rupiah remained susceptible to potential weakness.

Gareth Leather, an analyst with Capital Economics, said while further easing is dependent on the rupiah, the currency should stabilise over the coming months due to the shrinking current account deficit and improvement in global risk appetite.

"If we are right about the rupiah then rate cuts could come back onto the agenda soon," he said.