Benchmark Interest Rate and Economic Stability

KOMPAS/TOTOK WIJAYANTO

Governor of Bank Indonesia (BI) Perry Warjiyo (second from right) accompanied by Deputy Governor of BI (from left) Rosmaya Hadi, Destri Damayanti, and Erwin Rijanto, prepare to inform journalists about the results of the BI Board of Governors Meeting in February in Jakarta, on Thursday (20/2/2020).

Bank Indonesia (BI) decided to keep its policy interest rate unchanged at 4 percent during its board of governors meeting in Jakarta on Wednesday.

The central bank kept the 7-day repurchase rate unchanged as part of its policy to maintain economic stability and to spur economic recovery in the midst of the Covid-19 pandemic, after cutting the benchmark rate by 25 basis points, respectively, during the last two consecutive months (Kompas, 21/8/2020). BI also maintained the deposit facility rate at 3.25 percent and lending facility rate at 4.75 percent.

BI has taken into account the dynamics of the global economy and the situation in the domestic economy in maintaining its policy rate. With the current low inflation rate, there is still room for BI to lower the benchmark interest again in order to further boost the economy. However, the need to maintain stability, especially in the face of increased pressure on capital outflows,and to maintain the rupiah exchange rate, and to ensure government bondsremain attractive should be the main consideration of the central bank in keeping the interest rate.

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In addition, the need to manage the burden that must be borne by BI in relation to the burden-sharing scheme with the government in financing economic recovery could be another possible consideration.

The growing uncertainty due to the global recession has kept capital outflow pressures high and could put further pressure on the rupiah exchange rate, which is currently at the level of Rp 14,800 per US dollar. So far this year, the rupiah has depreciated 6.48 percent. Selling pressure also occurred on the stock market, causing the index to fall.

KOMPAS/NORBERTUS ARYA DWIANGGA MARTIAR

Public Discussion "Women\'s Economy: Beware of a Global Economic Recession" held by the Institute for Development of Economics and Finance (INDEF), on Friday (20/12/2019), in Jakarta.

A recession was difficult to avoid in the second quarter of 2020 when the country’s economy shrank 5.32percent.The ability to avoid the economic recession this year depends on efforts to preventnegative growth in the third quarter, such as the financial stimulus program in increasing spending and investment, which have so far contributed around 90 percent to economic growth.

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Increasing purchasing power and consumer confidence are the key. BI sees the prospect of economic recovery in the second halfasimproving. The current account deficit is low and inflation is also low and under control, while foreign exchange reserves are also increasing. As the rupiah is now fundamentally undervalued, the currency has the potential to strengthen. The country’s financial assets remain relatively attractive and the risk premium trend has also decreased.

If the improvement runs parallel with progress in controlling the spread of the coronavirus, Indonesia\'s chances to recover at the end of the second half and to book an economic growth of 4.5-5.5 percent in 2021 will also increase.

In the midst of the global situation that is still overshadowed by the threat of a second wave of the Covid-19 pandemic, signs of improvement in the domestic economy are expected to be able to withstand capital outflows and the weakening of the rupiah. If the improvement runs parallel with progress in controlling the spread of the coronavirus, Indonesia\'s chances to recover at the end of the second half and to book an economic growth of 4.5-5.5 percent in 2021 will also increase.

Looking ahead, it is likely that BI will continue to adjust the direction of the benchmark interest rate in line withthe dynamics in the domestic and global economy, particularly US interests. Globally, low or even negative interest rates have become a trend in the new normal era, amid growing worries that the global recession will be far worse than expected.

Several countries have introduced negative interest rates such as Japan, Switzerland and Denmark. The euro zone has kept interest rates at zero percent. In the US, the Federal Reserve has hinted its interest rate could fall to near zero percent in2022.