The rupiah briefly traded above 16,179 against the US dollar on the spot market on Thursday, a level reminiscent of the Asian Financial Crisis in 1998. (Antara Photo//Indrianto Eko Suwarso)
Bank Indonesia Cuts Rate, Vows to Maintain Financial Stability
BY :JAKARTA GLOBE
MARCH 19, 2020
Jakarta. Bank Indonesia, the country central bank, cut its benchmark interest for the second time this year on Thursday, as it bid to strike a balance between providing support for domestic economic growth during the harsh period caused by the Covid-19 pandemic and maintaining stability in the financial market amid a massive capital outflow.
The central bank slashed its 7-day reverse repo rate by 25 basis points to 4.5 percent in a move that Bank Indonesia Governor Perry Warjiyo said, "remains accommodative and is consistent with controlled inflation in the target corridor while serving as a pre-emptive measure to maintain domestic economic growth momentum."
Indonesia is still coping with the beginning of the Covid-19 pandemic, which, as of Thursday, has infected 309 people and claimed 25 lives in the country.
The pandemic was also expected to undermine the country’s export and disrupt tourism and cross-border mobility, the central bank said. "Non-building investment is also at risk of slower growth in line with goods and services exports and disruptions in the production chain," Perry said.
With the government preparing to inject fiscal stimulus to the economy, Perry said the largest economy in Southeast Asia would still expand by 4.2-4.6 percent this year, albeit slower than the central bank's previous estimation of 5.2-5.6 percent.
On the other hand, Bank Indonesia is also facing an external challenge to stabilize the foreign exchange market. The rupiah briefly traded above 16,179 against the US dollar on the spot market on Thursday, a level reminiscent of the Asian financial crisis in 1998.
The Jakarta Composite Index closed 5.20 percent lower to 4,105 on Thursday, as foreign investors sold Rp 633 billion more shares than it bought. Since the beginning of this year, the foreigners booked more than Rp 9.4 trillion net sales in the market.
"Global investors are dumping their holdings in stocks and bonds. Nowadays, cash is king," Perry said. "This is not about problems in fundamentals, or in the economy, but it's all about panic," he said.
Still, Perry ensured that the central bank remained in the market to stabilize the rupiah.
"We continue doing tipple intervention, in the domestic non-delivery forward market, in the spot market, as well as buying bonds in the secondary market," Perry said.
"From the morning until the afternoon, we remained in the market, to maintain confidence in the market mechanism and in the liquidity adequacy amid such a difficult time," he said.
To ensure liquidity for local banks, Bank Indonesia extends the tenor for government bonds repurchase facility to 12 months and opens daily bonds auction, effective on Friday.
Banks serving small, medium enterprises would be able to enjoy 50 basis points cut in their rupiah reserve requirement, starting on April 1. Previously the cut was only for banks serving international trade.
To ensures foreign exchange liquidity, Bank Indonesia now holds foreign exchange swap auction daily, from just three times a week earlier.
Bank Indonesia also moves forward the schedule for implementation of foreigners' Vostro rupiah account as underlying for domestic non-deliverable forwards (DNDF) transaction to Monday, from April 1. The central bank hopes the account would give more options for hedging instruments in the country.
Perry said the central bank would keep the market updated about its policy by holding a regular press conference every Tuesday at 2:00 p.m.