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Long way toward single digit lending rates
The target of achieving a single digit lending rate by the end of 2016 has already been missed.
This failure has not apparently dampened the spirits of Bank Indonesia (BI) in trying again to realize the single digit credit rate target this year.
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Bank Indonesia (BI) (Tempo/-)
T
he target of achieving a single digit lending rate by the end of 2016 has already been missed. Preliminary efforts, in the form of benchmark interest rate cuts, were suboptimal.
Throughout 2016, the policy rate was cut by 150 basis points, but lending rates only dropped by 79 basis points. As of December, the average credit rate was 12.04 percent.
This failure has not apparently dampened the spirits of Bank Indonesia (BI) in trying again to realize the single digit credit rate target this year.
From BI’s point of view, there is room to further lower credit rates this year. In fact, the decline in deposit rates is greater than that of lending rates.
However, the ability to reduce credit rates through cuts in BI’s policy rate is increasingly limited. Domestic pressures from fluctuations in inflation have been triggered by electricity price adjustments for the lowest segment of electricity users (900 VA), non-subsidized fuel and 3 kg-LPG canisters and the rise in volatile food commodity prices.
As a comparison, the Central Statistic Agency (BPS) announced that inflation during January 2017 stood at 0.97 percent. This is the highest January inflation rate for the last three years. Consequently, the targeted inflation range of 3 to 5 percent throughout 2017 may not be achieved.
External constraints include the possibility of an increase in US Federal Reserve (the Fed) benchmark interest rate three times this year and the gloomy prospects of global economic recovery. The Fed rate hike in December, for example, encouraged capital flight abroad, which affected the liquidity crunch in the domestic financial market.
