JAKARTA (Reuters) – Indonesia’s central bank will likely keep interest rates at record lows on Thursday, a Reuters poll showed, after its governor pledged to keep monetary policy accommodative for a while as inflation remains below target and COVID-19 cases rise.
All 26 economists in the poll unanimously expected Bank Indonesia (BI) to hold the benchmark interest rate at 3.50% for a fourth consecutive meeting.
Many central banks around the world have already signalled moves to unwind their pandemic-era monetary stimulus amid the prospect of a U.S. Federal Reserve tapering.
Governor Perry Warjiyo has promised BI would keep rates low and liquidity ample until policymakers see inflationary pressures, which he predicted would happen early next year.
Warjiyo has also said the central bank must be prepared for a potential tightening of U.S. monetary policy next year, warning such a move by the Fed could impact local financial markets.
Gareth Leather, economist with Capital Economics, said inflation was not a concern for now. Indonesia’s annual inflation rate accelerated to a 5-month high of 1.68% in May, but remained below BI’s 2% to 4% target range.
“Instead, the main worry for BI is the uncertain outlook for the rupiah,” he said, adding that expectations of a sooner-than-expected Fed tightening could add downward pressure on the volatile currency.
The rupiah has strengthened in recent weeks after dropping in mid-May due to talk of U.S. tapering.
Southeast Asia’s largest economy contracted 0.74% year-on-year in January-March after shrinking 2% in 2020 due to the fallout of the pandemic, but the government has said it expected the economy to emerge out of recession in the second quarter.
BI has slashed interest rates by a total of 150 basis points and pumped over $50 billion worth of liquidity into the financial system since the start of the coronavirus pandemic in 2020.
“Domestic growth and inflation dynamics warrant continued policy accommodation,” ANZ’s economist Krystal Tan said in a research note, adding that a rise in COVID-19 cases has heightened uncertainties.
The number of daily new cases has been rising in Indonesia, with Sunday’s 9,868 infections the highest since February. Hospitals in some cities were under strain, which may force authorities to tighten mobility restrictions.
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