BI holds key rate to help spur growth

The central bank keeps the country’s benchmark borrowing costs unchanged to “support stronger economic growth” amid mounting fears of a global slowdown.

Bank Indonesia’s six-member board of governors on Tuesday said it would keep the benchmark interest rate at 6.75 percent to boost bank lending, which would help boost economic activities in the country so that the central bank’s 6.6 percent growth target can be achieved this year.

The central bank has kept the interest rate unchanged for six consecutive months. The rate was increased only in February this year.

Economists also saw no reason for the central bank to raise rates as the inflation was still within the government’s target. The consumer index prices (CPI) dropped to a 14-month low of 4.61 percent in July, lower than the government’s 5.65 percent target and in the range of BI’s 4 to 6 percent inflation forecast this year.

BI’s move came amid heavy sell-offs in the global financial market as investors were concerned that Standard & Poor’s unprecedented downgrade of the US’ top-tier rating and escalating debt woes in the world’s largest economy, as well as in Europe, would affect worldwide economic growth and raise rates elsewhere.

“Bank Indonesia is confident that the impact of the recent turmoil in the global financial markets, due to the downgrade of the US credit rating, on the domestic financial market is limited, and can be contained with continuous monitoring of market development and coordination with the government,” the central bank’s governors said in a press statement.

After growing by 6.5 percent in the second quarter, BI expects the country’s economy to grow 6.6 percent in the quarter ending September 30 on “solid export performance, strong household consumption and faster investment due to higher demand and the realization of the government’s capital expenditure”.

The comment is contrary to popular market belief that global demand would slow as more debt burdens in the world’s rich countries would lower spending and hinder growth.

“There will be an exports disruption from Indonesia to the US. But China, Japan and other export destinations are not disrupted so the impact of slower growth in the US could be minimized,” Bambang Brodjonegoro, acting chief of the Finance Ministry’s fiscal policy office (BKF), told a press briefing on Tuesday.

Ryan Kiryanto, Bank Negara Indonesia (BNI) chief economist, considered BI’s latest move “Good for banking and real sectors” to sustain the 23.6 percent loan growth in July until the end of the year to support economic acceleration.

Bank Central Asia (BCA) economist David Sumual also viewed that the central bank might need to hold the rate steady to spur growth in Indonesia especially as price pressures have eased and with the gloomy global economic outlook.

Economists previously forecast a quarter of a percentage point increase in the BI rate to 7 percent by year-end at the latest as inflationary pressures were seen as heavy at the start of the year.

“Going forward, inflationary pressure is still emanating from the increase in household consumption during Ramadhan and Idul Fitri holidays,” the central bank’s statement reads. “Nevertheless, government policies on securing supply of foods, including through imports, is predicted to mitigate volatility of the prices further so that inflation will be kept under control.”