Indonesia’s central bank leaves rates on hold as landscape changes

Indonesia's central bank kept its policy rate at 3.5%, a move widely expected by market participants.

A few weeks removed from a policy rate cut, Governor Warjiyo held steady with the currency under pressure after the sharp swings in global bond markets.The central bank indicated it had “limited space” for additional rate cuts at the February meeting and recent developments narrowed the space for rate cuts even further.

Despite the pause, the central bank retained its expectations for growth, keeping its 4.3 to 5.3% GDP forecast while also still expecting the current account to post a deficit of 1-2% of GDP despite posting a healthy trade surplus last month.

Noticeably absent from the Governor's usual talking points was the usual pledge to retain an “accommodative stance” which was replaced with the strategy to pursue “accommodative macroprudential measures”. This subtle shift could signal a definite move away from the policy tool to provide monetary support, at least for now.

Governor Warjiyo reiterated his call to commercial banks to pass on lower borrowing costs to consumers as he moves to bolster weak bank lending amidst the pandemic. Last month, the central bank resorted to non-policy moves to help push lending to real estate and car lending and we expect it to continue to find ways to bolster bank lending without resorting to rate cuts.