ArrowArtboardCreated with Sketch.Title ChevronTitle ChevronEye IconIcon FacebookIcon LinkedinIcon Mail ContactPath LayerIcon MailPositive ArrowIcon PrintTitle ChevronIcon Twitter
Economy

Bank Indonesia lowers key rate for fourth time this year

Government and central bank adopt 'whatever it takes' stance on COVID-19

Bank Indonesia headquarters in Jakarta. The central bank has its benchmark rate by a full percentage point this year.   © Reuters

JAKARTA -- Indonesia's central bank lowered its benchmark interest rate for the fourth time this year, as it strives to support the country's faltering economy amid the coronavirus pandemic.

Bank Indonesia's latest cut on Thursday took the seven-day reverse repo rate to 4% from the previous 4.25%. That is the lowest since at least 2016, when the central bank began using the rate as its benchmark. The central bank has reduced the rate by a full percentage point this year.

"This decision is consistent with low inflation... and [is taken] as a further step to encourage economic recovery amid the COVID-19 pandemic," Gov. Perry Warjiyo said at an online news conference.

He added that Southeast Asia's largest economy likely contracted "around 4%" in the second quarter of this year, but the economic impact of the pandemic likely "peaked" in the three months ended in June.

Thursday's move was forecast by 14 of 26 economists polled by Reuters. The decision follows a "burden-sharing" agreement last week between Bank Indonesia and the Finance Ministry allowing the central bank to buy government bonds directly from the government.

Bank Indonesia will purchase 397.6 trillion rupiah ($27 billion) of bonds directly from Jakarta's $40 billion fiscal deficit-financing scheme and return all interest payments to the government.

The unusual arrangement, which blurs the line between the country's monetary and fiscal authorities, has been called by some economists an "unprecedented deficit-financing program."

Both the government and the central bank have adopted a "whatever it takes" approach to dealing with COVID-19's impact on the economy. With millions of people out of work, the government is forecasting a 0.4% contraction this year in its worst-case scenario.

Even before the agreement, the central bank was already purchasing government bonds to the tune of 36.69 trillion rupiah in primary market, a method that is frowned upon in modern central banking as it could lead to runaway inflation. The governor said that if there are signs of rising inflation, the central bank "will not hesitate to pursue the necessary policies on the monetary side."

Retail sales have crumbled, plunging 16.9% on the year in April falling by an even steeper 20.6% in May. In the banking sector, a Bank Indonesia survey showed that demand for new loans in the second quarter dropped 33.9% from a year earlier.

"We think further rate cuts are likely over the coming months, but the pace of easing is likely to be gradual," said Gareth Leather, senior Asia economist at Capital Economics. "The main reason we think further easing is likely is the poor outlook for the economy. Although activity is picking up, the high-frequency data that we track suggests that output remains very weak."

Indonesia has the highest number of confirmed coronavirus cases and deaths in Southeast Asia and continues to see over 1,000 new cases a day. The number of infections has nearly doubled since the central bank last held a held a monetary policy meeting on June 17-18.

President Joko Widodo said Monday that the coronavirus outbreak is expected to peak in August or September.

Sponsored Content

About Sponsored Content This content was commissioned by Nikkei's Global Business Bureau.

You have {{numberArticlesLeft}} free article{{numberArticlesLeft-plural}} left this monthThis is your last free article this month

Stay ahead with our exclusives on Asia;
the most dynamic market in the world.

Stay ahead with our exclusives on Asia

Get trusted insights from experts within Asia itself.

Get trusted insights from experts
within Asia itself.

Try 1 month for $0.99

You have {{numberArticlesLeft}} free article{{numberArticlesLeft-plural}} left this month

This is your last free article this month

Stay ahead with our exclusives on Asia; the most
dynamic market in the world
.

Get trusted insights from experts
within Asia itself.

Try 3 months for $9

Offer ends October 31st

Your trial period has expired

You need a subscription to...

  • Read all stories with unlimited access
  • Use our mobile and tablet apps
See all offers and subscribe

Your full access to Nikkei Asia has expired

You need a subscription to:

  • Read all stories with unlimited access
  • Use our mobile and tablet apps
See all offers
NAR on print phone, device, and tablet media

Nikkei Asian Review, now known as Nikkei Asia, will be the voice of the Asian Century.

Celebrate our next chapter
Free access for everyone - Sep. 30

Find out more