MACROECONOMIC ANALYSIS SERIES: BI Board of Governor Meeting, December 2020

Bank Indonesia’s rate cut last month to 3.75% as the effort of boosting economic recovery has not reflected in Rupiah depreciation, thanks to investor’s confidence in the domestic market. Rupiah has been relatively manageable amidst the prolonged uncertain condition of the pandemic. However, there is still no sign of improvement in aggregate demand in the short term, as the higher inflation last month was mainly driven by the higher prices due to the lack of food supply during the rainy season. Despite the sign of recovery from the higher global demand as reflected by the higher-than-expected Indonesia’s exports in November, the potential robust recovery is still uncertain as we have to see the future condition of the health issues and the effectiveness of the vaccines soon. However, the potential stricter restrictions due to the worsening pandemic all over the world since early December should be weighted on the future policy decision held by the government as well as BI. If the full shutdown happens as the efforts to reduce the potential hike in the number of virus cases during the end-year holiday, the consumer will hold back their spending, thus, aggregate demand will be muted. Further, the investor will see this movement as the bleaker outlook of economic recovery and they will hold back of flight back their assets into the haven market. Considering the prolonged uncertain condition of the health crisis and potential stricter restrictions soon, any monetary easing by cutting the policy rate will be too costly and risky for Rupiah stabilization. For now, we see that BI needs to hold its policy rate at 3.75% this month while maintaining the financial sector stability.

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