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BI holds 3.5% benchmark rate amid weak rupiah, unusually low inflation

Jakarta Post - May 25, 2021

Dzulfiqar Fathur Rahman, Jakarta – Bank Indonesia (BI) decided on Tuesday to hold its benchmark seven-day reverse repo rate at 3.5 percent amid a continually weakening rupiah and unusually low inflation last month, despite the Ramadan and Idul Fitri holidays.

Following a two-day policy meeting, BI also decided to maintain the deposit and lending facility rates at 2.75 percent and 4.25 percent, respectively.

"This decision is consistent with expected low inflation, efforts to stabilize the rupiah exchange rate and to speed up economic recovery," said BI Governor Perry Warjiyo in an online press conference on Tuesday.

BI is also planning to lower the ceiling for credit card interest rates from 2 percent to 1.75 percent, starting July, to spur borrowing.

The decision to hold the benchmark rate at a record low came after BI recorded continued depreciation of the rupiah and Statistics Indonesia reported a lower-than-usual inflation rate during the otherwise peak spending season of Ramadan and Idul Fitri, which ran from April to May.

Perry said the rupiah depreciated by 2.12 percent as of May 24 this year even though it was 1.42 percent stronger compared with the average level seen in April.

Aside from maintaining the stability of the rupiah, the bank is also leaving the policy rate unchanged as the annual inflation rate in April stood at 1.42 percent, lower than the 2.67 percent seen a year earlier. The inflation rate is lower than the central bank's targeted range of between 2 and 4 percent this year.

Faisal Rachman, an economist at state-owned publicly listed Bank Mandiri, said the central bank had limited room for another policy rate cut and thus, it was expected to stay at the current level until the end of the year. The current accommodative policies are required to support the country's economic recovery, he said.

"BI's space to further cut the policy rate keeps narrowing as the US economic recovery is accelerating faster than anticipated and as rising concern over inflationary pressures in that country hikes US 10-year Treasury yields," Faisal said in an analysis published on Tuesday.

The Indonesian 10-year bond yield was recorded at 6.45 percent and that of the US at 1.60 percent as of May 24, wrote Bank Mandiri, quoting Bloomberg data.

Source: https://www.thejakartapost.com/news/2021/05/25/bi-holds-3-5-benchmark-rate-amid-weak-rupiah-unusually-low-inflation.htm