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).

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This update consists of 10 pages

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