Indonesia's central bank keeps rates at record low to support recovery

JAKARTA (Reuters) – Indonesia’s central bank held its benchmark interest rate at a record low on Thursday as it tries to support the economy’s recovery from the coronavirus pandemic without adding downward pressure on the rupiah currency.

Bank Indonesia Governor Perry Warjiyo speaks during a media briefing at Bank Indonesia headquarters in Jakarta, Indonesia, November 15, 2018. REUTERS/Willy Kurniawan

Bank Indonesia (BI) kept the 7-day reverse repurchase rate at 3.50%, where it has been since February, as expected by the majority of economists in a Reuters poll. Its two other main rates were also kept unchanged.

“Let me repeat again that all of BI’s policies will be pro-growth this year,” Governor Perry Warjiyo told a streamed news conference.

“Monetery policy, with low interest rates and loose liquidity, will be continued.”

While BI expects the economic recovery to continue in the second half of the year, supported by progress in the vaccination drive and a reopening of the economy, Warjiyo said the Delta variant and the prospect of U.S. tapering posed risks.

The rupiah, which has been gradually falling in the past two weeks amid talk of U.S. tapering, gained slightly after BI’s announcement to trade 0.2% down from the previous day’s closing.

Minutes from the Federal Reserve’s July meeting released on Wednesday showed officials largely expect to reduce the U.S. central bank’s monthly asset purchases. Previous withdrawal of U.S. monetary stimulus triggered capital outflows and put pressure on emerging market currencies such as the rupiah.

But Warjiyo did not expect the impact from Fed tapering to be as big as during the 2013 so-called “taper tantrum”, when capital outflows triggered a 20% fall in Indonesia’s currency. He also said the central bank had policy tools to deal with any fallout from tapering.

BI will use currency stabilisation instruments to face potential capital outflows, the governor said.

Data this month showed Southeast Asia’s largest economy grew 7.07% in the second quarter, beating expectations, but some analysts worry restrictions on movement imposed in July to reduce COVID-19 cases could threaten the outlook.

The curbs have since been gradually eased ,however, as new infections fell after peaking in mid-July. Malls have reopened with 50% capacity and eating inside restaurants has been allowed in cities like Jakarta, although the government still requires remote working and schools remain closed.

Indonesia’s coronavirus outbreak is the worst in Southeast Asia, with nearly four million confirmed infections and more than 121,100 deaths.

BI has cut interest rates by a total of 150 basis points and injected over $57 billion of liquidity into the financial system since the pandemic began early last year, including by directly purchasing sovereign bonds in the primary market.

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