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BI raises key rate; bank loans still robust
Bank Indonesia, the country's central bank, has raised its benchmark rate a fourth consecutive time to 9 percent amid high inflationary pressure
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Bank Indonesia, the country's central bank, has raised its benchmark rate a fourth consecutive time to 9 percent amid high inflationary pressure.
"Bank Indonesia (BI) still sees a risk of inflationary pressure from volatile oil and food prices worldwide as well as domestic pressure," BI governor Boediono said Tuesday in a media statement.
Inflation in July rose to a 22-month high of 11.9 percent from a year earlier due mostly to the increase in the cost of food, the Central Statistics Agency reported.
BI expects inflation to reach between 11.5 percent and 12.5 percent by the end of 2008.
The BI rate increases affect the economy as it forces banks to adjust their lending interest rates upward, dampening demand for loans from individual and business customers alike. Lower lending growth means fewer productive activities and eventually slower economic growth.
The central bank said, however, the rate rises had yet to impact Indonesia's economy.
As of the end of June, bank lending had grown by 31.6 percent, well above the target of 22 percent to 26 percent. The gross rate of nonperforming loans also stood at 4.08 percent -- below BI's maximum tolerance of 5 percent.
Nevertheless, Anton Gunawan, Bank Danamon chief of economists, said the short-term impact would be that banks' net interest margin might soon drop, resulting in profit reduction.
A wider and longer impact will materialize between six months and one year after the increase takes place, Anton added.
On the BI rate increase itself however, Anton said market analysts had already expected it.
"There will likely be other increases ... to between 9.25 percent and 9.5 percent by the end of the year."
According to Boediono, a BI rate increase was needed to dampen inflation in the medium term. BI is eyeing an inflation of between 6.5 percent and 7.5 percent in 2009.
In addition to raising the interest rate, he said BI needed to strengthen the rate of the rupiah against the U.S. dollar and absorb liquidity to curb inflation.
BI will conduct open market operations to curb inflation while maintaining economic growth as targeted -- 6.2 percent.
BI did not mention how it would absorb the liquidity from the market, but Anton said it could come -- among others -- in the form of a rise in banks' minimum reserve requirements (GWM).
GWM is a fund banks will hold in the central bank as a form of reserve, the amount of which depends on each bank's third-party liabilities.
Calculating that banks' third-party funds are about Rp 1,500 trillion (US$165.46 billion), BI needs to raise the GWM to nearly 15 percent on average, from the current 8.5 percent on average, if it wants to absorb about Rp 20 trillion, Anton said.
