Bank Indonesia Cuts Rates, Pledges More Bond-Buying

Source: Regulation Asia Editors, Regulation Asia 2020-06-23

Bank Indonesia abandoned the practice of quantitative easing in 1999 to ensure fiscal discipline in the aftermath of the Asian financial crisis.

Bank Indonesia has cut its benchmark interest rate for the first time in three months amid a lower growth outlook for the year.

The central bank’s economic growth projection for the country was lowered to between 0.9% and 1.9% for the year, down from the previous projection of 2.3%.

“With all of these factors: inflation low, the need to lift GDP growth, a small current account deficit, we say there is room for further rate cuts,” said Bank Indonesia governor Perry Warjiyo.

The seven-day reverse repurchase rate was lowered by 25 basis points to 4.25% on Thursday (18 June).

“This decision is consistent with efforts to maintain economic stability and encourage national economic recovery amid Covid-19,” said Warjiyo, adding that the central bank sees room for even lower interest rates.

In total, Bank Indonesia has cut rates by 75 basis points this year, on top of four reductions last year totalling 100 basis points.

The central bank also lowered its deposit facility rate to 3.5% and its lending facility rate to 5% – to drive down the cost of consumer loans, corporate loans and mortgages, as well as yields on bond and other instruments.

“We will also provide liquidity for banks to ensure smooth debt restructuring and financing in order to support the recovery,” Warjiyo said, also pledging to continue buying direct government bonds in the primary market or through auctions.

This is the first time in 20 years that Bank Indonesia is engaging in quantitative easing, a policy measure it did not adopt even during the 2008 global financial crisis. The practice was abandoned in 1999 through a law designed to impose fiscal discipline in the aftermath of the Asian financial crisis.

Indonesia’s Finance Minister Sri Mulyani Indrawati recently told the FT that the government does not plan to rely on central bank financing in the long run, but that its tole as a standby buyer during “this very extraordinary time” help to enhance market reliability.

The central bank was given authority to buy government bonds in response to market panic in Indonesia as a result of Covid-19, which resulted in capital outflows, rising bond yields, and a sharp drop in the Indonesian rupiah.

Bank Indonesia Cuts Rates, Pledges More Bond-Buying

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