BI keeps policy rate unchanged as it focuses on debt purchases

Jakarta

INDONESIA'S central bank kept its policy rate unchanged as it uses other measures, like government bond purchases, to help shore up the economy.

Bank Indonesia (BI) kept its seven-day reverse repurchase rate at 4 per cent on Tuesday, as predicted by 23 of 25 economists in a Bloomberg survey. Two had expected a 25 basis-point reduction.

"There was no indication of any urgency to cut again, with BI sounding cautiously optimistic on recovery though we note that high frequency economic indicators have softened recently," said Mitul Kotecha, a senior emerging markets strategist at TD Securities in Singapore.

Aside from rate cuts, BI has opted for unconventional measures to revive the economy, which is set for its first annual contraction since the Asian financial crisis. The central bank has been buying bonds directly from the government to help fund stimulus measures, and has also eased banks' reserve ratio requirements as well as liquidity rules.

These channels are "more effective" at supporting the economy, governor Perry Warjiyo said. Direct bond purchases would remain a one-off policy this year, while BI can remain a standby buyer in debt auctions in the years to come, he added. The central bank has directly bought 229.68 trillion rupiah (S$21.1 billion) in government securities so far.

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Indonesian stocks inched up 0.8 per cent on Tuesday, marking a seven-day streak of gains to the highest level in nearly a month. The rupiah weakened 0.2 per cent to 14,725 a dollar.

Mr Warjiyo gave a more upbeat view of the currency, saying the rupiah remains undervalued and could build on its one per cent rally so far this October. The current account is expected to post a surplus in the third quarter and narrow its deficit for the full year to below 1.5 per cent of gross domestic product.

The rupiah is Asia's worst performer in 2020, down nearly 6 per cent against the US dollar this year. Global funds pulled about US$10 billion from local stocks and bonds so far in 2020.

The door for further rate cuts remains open amid subdued inflation and growth. Inflation is expected to ease below the lower end of the central bank's target range of 2 per cent to 4 per cent, the central bank said.

"We see scope for a limited 50 basis points of rate cuts after the US election given that the economic recovery is likely to undershoot policy makers' expectations," said Joseph Incalcaterra, chief South-east Asia economist at HSBC Holdings plc in Hong Kong. BLOOMBERG