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EDITORIAL: BI helps stimulate growth
We expect a much faster pace of government spending in the second half.
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Bank Indonesia building is shown in this picture dated November 2015. (JP/Wienda Parwitasari)
B
ank Indonesia’s decision last week to lower its seven-day reverse repo rate by 25 basis points to 4.50 percent, the first cut in the past 10 months, fulfilled the expectations of many analysts given the lower-than-expected economic growth in the second quarter, low inflation and well-managed current-account deficit.
The inflation rate seems to be well controlled at the set target of 4 percent, plus or minus 1 percent this year and 3.5 percent, plus or minus 1 percent next year. The headline inflation has been well-behaved so far this year as food inflation was kept under control even during Ramadhan and Idul Fitri in June and July.
The similar cut of 25 basis points made by the central bank in deposit and lending facility rates to 3.75 percent and 5.25 percent, respectively, was also made possible by improved macroeconomic stability and decreasing risks related to the United States Federal Reserve’s further tightening this year.
The monetary policy easing would certainly help stimulate credit expansion and consumer spending, reinvigorating growth in the second half, especially because the pace of government (public sector) spending is usually much faster in the second half. Yet more encouraging is that the lower rate will also help increase credit growth.
BI’s main objective seems to balance between supporting growth and maintaining macroeconomic stability, as seen in well-contained inflation and narrowing current-account deficit, alongside rising foreign reserves reaching new highs. Macroeconomic stability risks will likely be well-managed, especially after the government pronounced that there would not be any increases in the prices of electricity and fuel next year.
The rupiah also remained relatively stable, supported by foreign reserve assets, which at the end of last month were recorded at US$127.8 billion, equivalent to about nine months of imports and servicing government external debt.
Stability of the rupiah exchange rate seemed to have been supported by the inflow of foreign capital, along with the prospect of positive returns, followed by the abundant supply of corporate foreign exchange in the domestic foreign exchange market.
However, since the central bank has maintained its economic growth projection for this year at a range of 5 to 5.4 percent, despite the only 5.01 percent growth in the second quarter, which was lower than the 5.18 percent in the same period last year, we don’t foresee another rate cut for the rest of the year, unless growth fails to pick up despite the latest monetary policy easing.
Looking forward, we expect a much faster pace of government spending in the second half. Another boost will come from the multiplier impacts generated by accelerated infrastructure development.
But even if the growth rate in the third quarter fails to rise significantly faster than the second quarter, the central bank could still employ its other monetary policy tools, such as liquidity management by lowering the reserves requirement ratio and macroprudential measures by easing the loan-to-value ratio to maintain a good balance between stimulating growth and supporting macroeconomic stability.
