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Central bank lashes out at businesses

Bank Indonesia (BI) has lashed out at businesses demanding the central bank slash its key policy rate to trigger a lower lending rate amid calls for a lowered rate to revive economic growth

Tassia Sipahutar (The Jakarta Post)
Jakarta
Fri, November 20, 2015

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Central bank lashes out at businesses

B

ank Indonesia (BI) has lashed out at businesses demanding the central bank slash its key policy rate to trigger a lower lending rate amid calls for a lowered rate to revive economic growth.

In an economic seminar held on Thursday, BI senior deputy governor Mirza Adityaswara said that businesses often complained about the high lending rate without considering the reason behind it.

'€œWhen talking about interest rates, businesspeople only talk about the lending rate. They forget that banks can only disburse loans when they have funding sources and funding sources rely on the time deposit rate,'€ he said.

'€œSo they ask for a high time deposit rate, but at the same time, they want a low lending rate. Who will then bear the negative spread between time deposits and lending?'€

Mirza'€™s remarks came as the pressure on BI to start lowering its interest rate to support the weak economy is growing.

However, it stood its ground by announcing a steady benchmark interest rate of 7.5 percent during the latest monthly board of governors meeting on Tuesday, citing the need to focus on the stability of the rupiah.

Both lending facility and deposit facility rates were kept at the same level as well, at 8 percent and 5.5 percent, respectively. By keeping all rates on hold, BI has maintained them at the same level since February.

According to Mirza, one key factor that can push key interest rates down is inflation. He acknowledged that currently inflation was heading toward a downturn cycle, but added that more time was needed to see it really stabilize.

The latest data from the Central Statistics Agency (BPS) showed that the year-on-year (yoy) inflation rate stood at 6.25 percent at the end of October, down from the 6.83 percent yoy rate in September.

Mirza argued that the relatively high inflation prompted funding customers to ask banks to jack up the time deposit rate as compensation, even if the rate was higher than the guaranteed interest rate set by the Deposit Insurance Corporation (LPS).

At the moment, the LPS rate is fixed at 7.5 percent for rupiah time deposits amounting to Rp 2 billion (US$145,064) per customer and 1.25 percent for foreign-denomination time deposits.

'€œPeople with time deposit of more than Rp 2 billion ask for higher rate than the LPS. They also say, '€˜Inflation reached 8 percent last year, how come I have an interest rate below 8 percent?'€™'€

Mirza also attributed BI'€™s hawkish stance to the stability of the exchange rate, saying that a rate cut could prompt foreign investors'€”who own 37.4 percent of government securities and 43 percent of the stock market '€” to ditch their rupiah assets and hurt the currency.

When contacted, Hariyadi B. Sukamdani, chairman of the Indonesian Employers Association (Apindo) and deputy chairman of the Indonesian Chamber of Commerce and Industry (Kadin), shot back at BI, saying that the central bank was '€œnot good at reading the momentum'€.

'€œBI was slow to react. It should have immediately slashed the rate when the rupiah strengthened in October,'€ he said in a telephone interview.

Hariyadi said that Kadin maintained its request of a rate cut as soon as possible to assist companies to revive their businesses. '€œBI should be confident that the situation will still be fine if it lowers its rate.'€

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