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Limited impact expected after BI rate hike
Bank Indonesia (BI) is optimistic that the latest interest rate hike will not severely dampen economic growth, after it implemented a monetary-tightening strategy that was described by analysts as âsymbolicâ with minimal impact on liquidity absorption in the market
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Bank Indonesia (BI) is optimistic that the latest interest rate hike will not severely dampen economic growth, after it implemented a monetary-tightening strategy that was described by analysts as 'symbolic' with minimal impact on liquidity absorption in the market.
BI Senior Deputy Governor Mirza Adityaswara said on Wednesday that the central bank's tight-bias monetary policy would remain 'accommodative' to economic growth, despite the latest move to lift the benchmark BI rate by 25 basis points to 7.75 percent.
This is because the deposit facility rate (Fasbi), an influential monetary tool that acts as a benchmark for interbank market rates, was kept unchanged at 5.75 percent, he explained via text message.
'Ample liquidity in the system implies this [Fasbi] is the operative rate and the most important for transmission of policy to the market,' said Daniel Wilson, an economist with ANZ Bank. 'No hike in the Fasbi implies no liquidity tightening.'
BI has maintained that the economy could grow by at least 5.1 percent this year, before rebounding to between 5.4 and 5.8 percent next year.
Wilson concluded that the BI rate hike might be symbolic in nature to rein in inflation expectations with minimal impact on growth, given that no stronger liquidity tightening actually took place after the move.
The interest-rate mechanism in Indonesia's monetary policy has three benchmarks.
First, the lower corridor or Fasbi, which is the rate that commercial banks get for depositing excess liquidity overnight with BI; second the middle benchmark or BI rate; and third the upper corridor or lending facility rate (Repo), which is the interest rate that banks must pay when lending to BI at times of stress.
While the Repo rate was recently increased by 50 basis points to 8 percent, the move 'did not have a significant impact' on the market as the facility was rarely used by local banks, according to Helmi Arman, the chief economist of Citibank in Indonesia.
Nevertheless, he argued that the BI rate hike would affect customer deposit rates of commercial banks, thus driving up banks' cost of funds and squeezing their profit margins.
'The BI rate move specifically may reverse recent margin gains by banks,' Helmi said. 'The caveat is that some banks interpret the move differently, thus they could at the margin become more stringent in disbursing new loans.'
Local bankers have said that they will not alter their interest-rate levels in the near future despite the BI rate hike, thus dealing with lower margins. 'For now, we will maintain the current level of interest rates, though we will remain watchful of inflation and liquidity conditions,' Bank Central Asia (BCA) president director Jahja Setiaatmadja told The Jakarta Post.
Meanwhile, Bank CIMB Niaga finance director Wan Razly Abdullah said his bank would first review the potential increase in its cost of funds before deciding on any adjustment in interest rates. 'There has been an improvement in domestic liquidity conditions in the banking industry,' he wrote in a text message. 'Nonetheless the rate increase will still decelerate credit growth.'
The market responded positively to BI's latest tightening. On Wednesday, foreign investors posted a net buy of Rp 431 billion (US$ 35.5 million) of Indonesian stocks, boosting the Jakarta Composite Index (JCI) by 0.5 percent to close at 5,127.9.
Meanwhile, he rupiah appreciated by 22 basis points to trade at 12,124 per US dollar, its strongest level in two weeks, according to the Jakarta Interbank Spot Dollar Rate (JISDOR).
'We did not think further tightening was necessary, ' said Lim Su Sian, a Singapore-based economist with HSBC Bank. 'Nevertheless there is no harm done with one more 25 basis-point rate hike, and it is in keeping with BI's growing image as a preemptive central bank.'
