It came as a big surprise to us when the central bank of Indonesia (Bank Indonesia) announced on 19 November 2020 (the day it concluded its two-day monetary policy meeting) that it decided to cut its benchmark interest rate (the seven-day reverse repo rate) by 25 basis points to 3.75 percent. Bank Indonesia also cut its deposit facility and lending facility rates by 25 basis points to 3.00 percent and 4.50 percent, respectively.
The graph below [available in our update] shows that – with the country’s benchmark rate at 3.75 percent – Indonesia now has an exceptionally low interest rate environment; in fact the lowest in recent history.
What drove Bank Indonesia to make this decision?
A few weeks back, like most of the world, Indonesia officially entered an economic recession (for the first time since the Asian Financial Crisis in the late-1990s) as the country’s gross domestic product (GDP) contracted for two consecutive quarters (in Q2-2020 and Q3-2020). Massive pressures on the Indonesian economy stem from the self-imposed social and business restrictions that have been imposed by central governments in Indonesia and around the globe (in an attempt to limit the spread of COVID-19), and thereby seriously disrupting consumption, production, investment, and trade.
While in most fellow Asian nations the COVID-19 pandemic has (more-or-less) been brought under control, Indonesia still sees the number of new confirmed COVID-19 cases rising ever since the virus was first detected onshore in early March 2020. New COVID-19 infections have now topped 506,000 with over 16,000 COVID-19 related deaths. This makes Indonesia among the worst-hit Asian countries.
Considering the COVID-19 situation is still not under control, while the economy has already taken a serious hit, it is a tricky situation for Indonesia. Fully re-starting the economy is not an option yet. Nonetheless, the central bank is more than willing to assist Indonesia’s central government in terms of encouraging economic activity (even though – ironically – an increase in economic activity jeopardizes an increase in COVID-19 patients).
This update consists of 10 pages
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