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

Since March, BI has become more concerned over economic growth risks and shifted its policy stance to one that preemptively supports growth to mitigate the impact of the health crisis  while managing the financial market stability. However, the increased risk of the deeper contraction in the global economy, coupled with the prospect of the prolonged spread of the virus in Indonesia, has caused uncertainty in the market at least since early September. As a consequence, Rupiah has weakened to the level of IDR14,900 as of September 14, 2020. It is recorded as the worst-performing currency in emerging Asia. Meanwhile, the accumulation of capital inflows further plunged, thus, picked up the government bonds yields. Despite the very low inflation last month, the credit demand is expected to be halted in the near future following the extension of large-scale social restrictions (PSBB) in the Jakarta area. These conditions provide room for BI to prioritize Rupiah stabilization this month due to the heightened risk of uncertainty in the financial market. Therefore, we view that BI should keep its interest rate at 4.00% this month to maintain financial stability while supporting growth through the macroprudential and unconventional measurements as the channels in prompting liquidity.

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