Indonesia's unchanged policy rate reflects optimism and flexibility

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DECEMBER 23, 2019 - 7:36 PM

The Indonesian central bank's decision to keep interest rates on hold will mean greater monetary policy flexibility for 2020, should the economy need further stimulus, according to Maybank Kim Eng analysts.

"We see the economy currently needing more liquidity injection in order to manage the crowding-out should the government compete with the private sector for funding and liquidity," analysts Luthfi Ridho and Isnaputra Iskandar said in a recent report.

Bank Indonesia (BI) has left its interest rate unchanged for the first time in five months, an indication that it is confident about economic growth in the fourth quarter of 2019 and throughout 2020, Maybank KE said. Its full-year growth target for 2019 is 5.1 per cent, and 2020 forecast is between 5.1 to 5.4 per cent. Maybank KE analysts said they share this view as economic growth is likely to remain stable at 5 per cent.

"A tighter liquidity situation would likely emerge in the near term as the government seeks additional funding to finance the budget deficit. This would leave a smaller amount of liquidity available for the private sector. Once the private sector’s liquidity demands increases, the crowding-out situation would likely push up the loan-to-deposit ratio even further," the analysts wrote.

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They also expressed surprise at the Indonesian rupiah's (IDR) continued appreciation, adding that the currency's stability is partially due to lower oil imports in terms of both value and volume.

Meanwhile, the 100 basis-point rate cuts this year has not had an impact on inflation, they noted, adding that the BI had stated that inflation is likely to end the year at around 3.1 per cent year on year, which is "a soft and manageable level".

"Going forward, we are of the view that Indonesia’s macroeconomic stability is promising for businesses and investments," the analysts said.

The only challenge for Indonesia is to increase economic growth, which would likely perform hand-in-hand with the recovery of the global economy, they said, adding that investments are expected to be the engine of growth going forward as the macro environment of stable IDR and low interest rates continues.