Bank of Indonesia: Easing cycle is not over yet – UOB

The Bank of Indonesia (BI) could still reduce further its benchmark interest rate in Q4 2020, suggested Economist Enrico Tanuwidjaja and Haris Handy at UOB Group.

Key Quotes

“Bank Indonesia (BI) decided to leave its benchmark rate unchanged at 4.00% at its October 2020 monetary policy meeting (MPC), which is in line with consensus forecast. Consequently, Bank Indonesia (BI) maintained the Deposit Facility rate at 3.25%, as well as the Lending Facility rate at 4.75%. BI reiterated that the decision is in line with the need to maintain exchange rate stability, with inflation expected to stay low.”

“BI keeps its emphasis on the quantitative easing through the provision of liquidity to promote economic recovery, including BI’s support for the government in accelerating the realization of the 2020 State Budget.”

“We still view that BI may cut the BI 7 Day Reverse Repo rate by another 25bps in Q4 to 3.75% as growth recovery trajectory may be slower than expected. Nevertheless, we acknowledge on the probability of rate cut to be ruled out, given high global financial market uncertainty. We will review our call after Indonesia’s 3Q20 GDP data release in November 5th , 2020. BI forecasts that current account deficit may narrow below 1.5% of GDP this year. Meanwhile, inflation is expected to be below the lower bound of the 2-4% target in 2020, and to return within the target range next year. Going forward, we still expect BI to deploy other easing measures to help with the national economic recovery.