Bank Indonesia seen standing pat on rates amid severe COVID-19 outbreak

BANK INDONESIA / BI - JAKARTA. Indonesia's central bank will likely keep its key interest rate at a record low this week, a Reuters poll showed on Monday, as policymakers focus on supporting Southeast Asia's biggest economy amid the nation's most severe COVID-19 outbreak yet.

At a two-day policy meeting ending on Thursday, Bank Indonesia is expected to hold its 7-day reverse repurchase rate at 3.50%, where it has been since February, according to all 31 analysts surveyed by Reuters.

The country has been battling one of Asia's worst outbreaks with cases topping 50,000 a day in four of the past five days and daily deaths from the respiratory disease reaching around 1,000 each day.

Java and Bali islands and other parts of the archipelago have been under strict movement restrictions since early July and authorities are assessing whether to extend them beyond Tuesday.

The outbreak and restrictions have prompted policymakers and economists to downgrade their expectations for Indonesia's economic recovery.

BI last week slashed its 2021 GDP growth forecast to 3.8% from 4.6%, based on an initial assessment and assuming containment measures will effectively control the outbreak within a month. Indonesia's GDP shrank 2.1% last year, the first contraction since 1998, due to the fallout of the pandemic.

Governor Perry Warjiyo has urged lawmakers to take measures to mitigate falling household consumption, while stressing that the BI must maintain stability in financial markets amid talk of the U.S. tapering off its quantitative easing.

"BI will want to keep monetary policy accommodative, but its scope to manoeuvre has narrowed in an environment of rising expectations of U.S. rate hikes and a stronger USD," said Krystal Tan, an ANZ economist.

The rupiah has hovered around 14,500 a dollar this month, about 2% weaker compared to the last peak in June, pressured by global uncertainty and the worsening COVID-19 outbreak at home.

BI has in total trimmed interest rates 150 basis points and injected over $57 billion of liquidity during the pandemic.

Wellian Wiranto of OCBC said the central bank will likely focus on strengthening the impact of past easing. "BI would continue to bang the drum and get the banks to pass on these cuts, rather than undertaking new easing," he said.

All 23 analysts in the poll who gave medium term forecast expect no change in the benchmark rate until the end of the year, with a minority tipping a 25-bps hike in the first quarter of 2022.