JAKARTA (Reuters) - Indonesia’s central bank came under pressure from lawmakers on Thursday to escalate its response to the economic fallout from the coronavirus pandemic, even as it cut its benchmark interest rate to a two-year low.
Bank Indonesia (BI) delivered its third rate cut this year on Thursday, and said there was scope for more. It has trimmed 175 basis points in an easing cycle since last year to bolster growth.
Said Abdullah, chairman of parliament’s budgetary committee, urged BI to fund the government’s health and welfare programmes of 397.56 trillion rupiah ($28.38 billion) by buying bonds with a zero coupon as part of the central bank’s “burden sharing”.
“We can’t go to the poor and say ‘Here is a government programme for you, but please know that it comes with an interest rate from BI’,” Abdullah said during a hearing to discuss the government’s 2021 budget.
Planning Minister Suharso Monoarfa, who also attended the hearing, suggested two alternatives: BI buy bonds with yields of 0.1% to 4.5% or bonds with no yield.
“If we see the most basic formula, exports, imports, consumption and investment are down. The only (driver of growth) is government expenditure. If the government is being saddled again with interest payments, I don’t think it’s fair,” Monoarfa said.
Finance Minister Sri Mulyani Indrawati also told the hearing she hoped BI would make its policy even more accommodative as inflation “is not a threat for now”. May’s inflation rate was the lowest in 20 years.
The suggestions made in the hearing about zero coupon bonds “would be used in our negotiations with BI”, she said.
“With COVID-19, we are seeing a dramatic increase in the budget deficit that will be a burden for the next 10 years, so the burden sharing with BI is key to managing COVID-19 without increasing the fiscal burden on development programmes,” she said.
Destry Damayanti, BI’s senior deputy governor who was at the hearing, told parliamentarians the suggestions would be discussed in a high-level forum with Indrawati later.
Governor Perry Warjiyo attended a closed door meeting with parliament’s finance commission at the same time, where he was also pressured to agree to buy low-yielding government bonds, two parliament members told Reuters.
The pressure on BI “to print money” could ruin investors’ trust in Indonesia and lead to inflationary problems later on, said Bhima Yudhistira Adhinegara, an economist with Jakarta-based think-tank the Institute for Development of Economics and Finance.
“Investors will doubt BI’s independence especially if it bows to the request for 0% interest rate,” Adhinegara said.
BI has bought a relatively small amount of government bonds directly in auctions as a non-competitive bidder, with yields determined by the market. It has also bought bonds in the secondary market.
Additional reporting by Fransiska Nangoy ando and Tabita Diela; Editing by Hugh Lawson and Alex Richardson
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