The central bank decision to keep its key interest rate constant should help improve market liquidity by speeding up the drop in lending rates, which has been slow to come in the aftermath of the global crisis, a study says
he central bank decision to keep its key interest rate constant should help improve market liquidity by speeding up the drop in lending rates, which has been slow to come in the aftermath of the global crisis, a study says.
"Whilst policy rates are being kept on hold, we reiterate our view that improving market liquidity conditions should continue to aid a cyclical reduction in the cost of capital and market lending rates where declines have been relatively slow due to tight liquidity conditions experienced by the economy," said a recent research report by Morgan Stanley Asia.
In line with this prediction, Coordinating Minister for the Economy Hatta Radjasa has also expressed his hope that the BI rate would trigger the banks to cut their lending interest rates.
"With lower interest rates, we hope the real sector will be boosted again," he said on Friday.
As of the third quarter, the average lending interest rate stayed at 15.13 percent, down by a meager 0.69 percent from the previous quarter.
Chatib Basri, an adviser to the finance minister, shared Hatta's opinion, saying that the Bank Indonesia keeping its reference rate stable would not only be supportive in encouraging banks to further cut lending rates, but would also support exports and investment.
"This latest report shows that our exports declined by about 15 percent. Exports have begun to recover but still at a slow pace. The global economic crisis has eased but this takes time to impact on investment and export rates," Chatib said.
He said there might still be negative export growth persisting towards the end of the year, but at a lower rate than before.
"Exports will drop by only about 10 percent *by the end of 2009*," he said.
Unlike exports, the investment rate has regained ground and demonstrated positive growth. "Investment is already going up, albeit slowly. We expect 4 percent growth in investment this year," he said.
Hatta said that the government is expecting investment to grow by 7 percent in 2010.
The central bank has kept the BI rate at 6.5 percent for the fourth consecutive month given there are good economic prospects ahead.
Morgan Stanley understands that the government faced difficulties and was unable to boost lending rates in line with the expectations set by the central bank.
Bank Indonesia initially estimated bank lending would grow by 15 percent this year, far lower than the 30 percent growth booked in 2008, as the global downturn caused many businesses to fold and others to put their expansion plans on hold.
The bank has since revised its lending growth target to 10 percent, but even the this figure seems hard to achieve as lending only grew 4.2 percent from January to October.
Morgan Stanley reported that the latest credit growth figures had fallen into single-digit territory for the first time since August 2006.
In October 2009 growth in bank lending was only 9.6 percent compared to last year, representing a sharp deceleration compared to the recent high of 39.3 percent in October 2008.
"As a result, commercial banks such as Bank Mandiri and Bank Tabungan Negara amongst others have recently announced further lending rate cuts," Morgan Stanley said. (bbs)
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