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Business & Finance

Indonesia central bank seen keeping rates at record low at 2020's final meeting

  • The pandemic has pushed Southeast Asia's largest economy into recession for the first time in 22 years.
Published December 14, 2020

JAKARTA: Indonesia's central bank is expected to keep its key interest rate unchanged at the year's final policy meeting on Thursday, having cut five times and launched massive quantitative easing to fight the impact of the pandemic, a Reuters poll showed.

Eighteen of 22 analyst in a Reuters poll forecast Bank Indonesia (BI) will maintain the 7-day reverse repurchase rate at its record low of 3.75pc, while four others predicted a 25 basis point (bps) cut.

This year, BI has cut interest rates by a cumulative 125 bps, pumped more than $50 billion into the financial system, including by purchasing bonds directly from the government, and relaxed lending rules to help the economy weather the impact of the COVID-19 pandemic.

The pandemic has pushed Southeast Asia's largest economy into recession for the first time in 22 years.

The country has the biggest outbreak in the region with over 600,000 infections and more than 18,000 deaths.

BI's easing cycle predated the pandemic. It reduced rates by 100 bps in 2019 to lower borrowing costs.

Governor Perry Warjiyo has pledged to keep monetary policy loose next year, with interest rates low and liquidity ample, until the central bank sees signs of rising inflation.

The annual inflation rate in November was 1.59pc, below BI's 2pc-4pc target range, but Warjiyo expected inflation to return to the central bank's target range next year as the economy recovers.

BI forecasts 2021 economic growth within a range of 4.8pc-5.8pc, rebounding from an estimated GDP contraction of 1pc-2pc this year.

"With BI having already lowered its policy rate by a total of 225 bps in the current rate easing cycle, in tandem with the U.S. Fed, the scope for rate cuts is now more limited," analysts at ANZ said in a note on Friday, predicting quantitative easing to be BI's primary tool to support growth in 2021.

Citi Indonesia, among the minority expecting a rate cut this Thursday, said BI might be concerned by a slower than anticipated GDP recovery.

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