Bank of Indonesia to set interest rate

Bank Indonesia (BI) policymakers will meet today to deliberate an additional cut to its benchmark interest rate, which is currently held at 4.25% following three reductions this year.

Per economic forecasts, the rate cuts have reinvigorated the Indonesian economy amid the COVID-19 pandemic. Indonesia has also experienced its lowest inflation rate in a decade, resting at 1.96% in June due to reduced consumer activity stemming from large-scale shutdowns. The low inflationary pressure and exchange rate gains have empowered BI to cut interest rates without fear of devaluing the rupiah.

Expect BI to leverage further cuts—to an estimated 4%—in an effort to tide over the delayed implementation of the $49 billion National Economic Recovery stimulus package (PEN). The much-needed boost from the PEN has yet to materialise, as less than 34% has been disbursed to date. Data verification difficulties, unlawful deductions by local administrators and poor ministerial coordination have deprived the country of this assistance. Although only 0.06% of the stimulus budget has been spent on small and medium-sized enterprises, the easing of borrowing rates will likely expedite their return to normalcy given the government’s overt focus on the sector. A further rate cut would be a welcome move—even necessary to prop up the economy as restrictions are lifted in the third quarter—especially as the threat of a stock market crash and currency depreciation looms.

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