Bank Indonesia Governor Perry Warjiyo. (Photo courtesy of Bank Indonesia)

Bank Indonesia Surprises With 25bps Rate Cut as Gov't Confident the Worst Has Passed


NOVEMBER 19, 2020

Jakarta. Bank Indonesia, the country's central bank, has cut its benchmark interest rate in a surprise move to accelerate economic recovery amid growing confidence that the worst hit from the Covid-19 pandemic has passed. 

The central bank lowered its seven-day reverse repo rate by 25 basis points to 3.75 percent, the lowest since Bank Indonesia introduced the new benchmark in 2016. The market had expected the central bank to keep the rate for the fourth time since the last cut in June.  


"The decision is based on projected low inflation, maintained external stability as well as follow-up policy measures to expedite the national economic recovery," Bank Indonesia Governor Perry Warjiyo said in a statement on Thursday. 

Inflation has hovered well below Bank Indonesia's 3 percent target so far this year. Last month, the annual inflation rate was at 1.44 percent, picking up slightly from 1.42 percent in September.

The country's growth domestic product contracted 3.49 percent in the third quarter this year from the same quarter last year, an improvement from 5.32 percent contraction in the second quarter, thanks to increasing government stimulus spending, public mobility, and global demand.

Perry Warjiyo said the indicators pointed toward recovery in the economy. "We estimate, God willing, GDP growth will start to be positive in the fourth quarter and continue to increase in 2021," he said.

A day earlier, Finance Minister Sri Mulyani Indrawati said that Indonesia might have seen the worst hit from the Covid-19 pandemic but remain cautious about its path to recovery. 

“The worst is over, but it doesn't mean, and it doesn't guarantee it will continue to be good if we don't keep up. That's why what is called a reversal, turning around, is a phenomenon that we are certainly grateful for, but this does not mean the problem is over," Sri Mulyani said. 

The government had spent half of its Rp 695 trillion ($49 billion) economic stimulus budget for healthcare, social safety net, debt restructuring, and tax breaks. The government finance most of the stimulus using bonds, which Bank Indonesia buys in the primary market. 

"Bank Indonesia remains firmly committed to providing liquidity, including support for the government in terms of accelerating state budget realization in 2020," Perry said. 

As of Tuesday, Bank Indonesia had purchased Rp 457 trillion worth of government bonds in the primary market, using a burden-sharing mechanism. Under the mechanism, Bank Indonesia gives back to the government the interest it gained from the bonds in varying degrees depending on whether the bonds' proceed are used to finance public goods, small-medium enterprises, or other purposes.