Since March 2019, the US bond market has recorded an inversion of the yield curve for US government bonds, meaning that short-term bond yields have exceeded long-term bonds. This condition indicates a negative perception of US economic performance because an inverted yield curve usually predicts a recession in the near future. Although the transmission channel from global shocks to the domestic economy via capital flows is not yet clear in 2020, concerns about a crisis in the US could trigger speculation in the foreign exchange market and in the capital market. This will affect the Indonesian financial system by triggering capital outflows, which will put great pressure on the Rupiah. However, if the government and Bank Indonesia (BI) can manage market expectations, capital flows will return to Indonesia after the turbulence period ends. We estimate that there is a possibility for BI to, at least, lower the policy interest rate once again and then hold it in 2020 until the volatility of the Rupiah requires monetary tightening. The ongoing monetary easing will support credit growth in 2020.

Download (PDF, 1.54MB)