Indonesia’s central bank cuts interest rates to record lows
Indonesia’s central bank (CB) cut interest rates to record lows on Thursday and urged commercial banks to follow suit as it sought to reignite Southeast Asia’s largest economy which has been hard hit by the coronavirus pandemic.
Bank Indonesia (BI) cut the 7-day reverse repurchase rate by 25 basis points to 3.75%, against the expectations of a majority of economists in a Reuters poll. Eight out of 22 economists surveyed expected the move.
Indonesia’s rupiah pared losses ater the rate cut, while shares also picked up a notch. The Philippine central bank also cut rates unexpectedly on Thursday as the two countries hardest hit by COVID-19 in Southeast Asia kept their monetary policy taps open.
“Our loose monetary stance is not only reflected in the 3.75% rate, which is low, but it is worth noting the very large monetary expansion that we have done,” said Governor Perry Warjiyo during a virtual news conference.
He said the central bank remained commited to providing liquidity, adding it had already pumped some 680.89 trillion rupiah ($48.12 billion) into the banking system this year.
BI’ cut, which took the rate to its lowest since BI began using it as its benchmark in 2016, comes as Indonesia has struggled to contain an outbreak which has tipped its economy into its first recession since the Asian financial crisis.
With the BI reluctant to cut rates in recent months when the rupiah was weak, for fear of capital fight, the recent rise in the local currency also gave the central bank an opportunity to take action, analysts said.
“The cut reflects the central bank’s desire to support the economic recovery, while recent gains in the IDR gave the central bank room to act,” said ANZ analysts in a note.
The rupiah has gained nearly 4% since BI’S October meeting amid a broader market rally, but Warjiyo said it was still undervalued and had room to strengthen.
The governor sounded upbeat on the outlook, saying recent indicators - including retail sales and purchasing managers’ index - suggested the economy could grow in the fourth quarter.
He also said uncertainty in global financial markets had eased following the US election results and positive news on COVID-19 vaccine trials.
But he noted bank lending fell 0.47% annually in October - the first contraction in Refinitiv data dating back to December 2002.
“Through this forum, I implore banks to lower their interest rates,” Warjiyo added.
With Thursday’s move, BI has slashed interest rates by a total of 125 basis points this year to help Indonesia withstand the coronavirus fallout.
Faisal Rachman, Bank Mandiri economist, expects Thursday’s cut to be the BI’S last in the current easing cycle.
Meanwhile, Indonesia’s new sovereign wealth fund will offer dedicated industry funds in a bid to drum up $15 billion investment and deepen access to global capital by Southeast Asia’s biggest economy, Finance Minister Sri Mulyani Indrawati told Reuters.
The structure, outlined in a briefing by top economic ministers last Friday, has been adopted to entice global investors with various appetites for risk, return and the length of investment.
“They will have the flexibility to invest in many portfolios,” Sri Mulyani told Reuters, citing electricity, toll road and health sectors as examples. She said the industry-based funds would operate under an over-arching “master fund”, in which investors could also inject money into.
Indonesia’s new fund underpins a target by the world’s fourth most populous country to become a top-five economy in 25 years. That ambition has been hamstrung in part by Indonesia’s shallow capital markets, which increases reliance on foreign direct investment or, more oten, borrowings.
“That’s creating a higher leverage which in the medium- to long-term is not going to be sustainable,” said Sri Mulyani.
Co-ordinating minister for maritime affairs and investment Luhut Pandjaitan told the briefing the fund “could change Indonesia in the near future, how we run this country”.
Luhut headed to the United States and Japan at the weekend to pitch the fund to private equity firms. He will also discuss the fund, to be known as the Indonesia Investment Authority, with the World Bank and the International Monetary Fund.
Indonesia’s youthful population, abundant natural resources and proximity to the world’s fastest growing region is attractive to investors but poor infrastructure, red tape and corruption have made some wary.
The government’s new Job Creation Law, of which the fund is part, seeks to address some of those concerns, most notably by harmonising regulations contained in 79 different laws.
Bank Indonesia urges commercial banks to follow suit as it sought to reignite Southeast Asia’s largest economy, which has been hard hit by COVID-19