B

ank Indonesia (BI) expects its decision to lower the primary reserve requirement ratio to help spur the country'€™s economic growth, although its benchmark interest rate remains unchanged, according to its official.

On its Nov. 17 board of governors meeting, the central bank lowered the reserve requirement ratio (GWM) to 7.5 percent from 8 percent, effective Dec. 1, while maintaining its key rate at 7.5 percent, the same level since February.

With a lower reserve requirement, or minimum funds that banks need to hold in reserve, the central bank has decided to support the economy while also maintaining stability amid risks of capital outflow, according to BI director for monetary policy Solikin M. Juhro.

Solikin said that both lowering the reserve requirement and cutting the interest rate had a similar goal, which was to stoke bank loans to boost the economy, but adding that '€œthere will be a larger sacrifice if we cut the interest rate.'€

'€œThe country has seen a decline in net inflows, so a rate cut will make us less attractive [to investors] and have a poor effect on the overall macroeconomic balance,'€ he said in a press briefing on Tuesday.

Solikin added that the central bank was '€œready'€ to cut its key rate as the country'€™s macroeconomic data had shown improvements in terms of inflation rate and current -account deficit.

He said the central bank was convinced that the inflation level could reach 3 percent at the most by the end of 2015, or below its target of 4 percent with more or less 1 percent.

'€œAs year-to-date inflation stood at 2.73 percent in November, inflation will reach 3 percent or slightly less by the end of this year if the average rate of 0.6 to 0.7 percent in December is reached,'€ he said.

Despite having ample space to cut its interest rate, Solikin said the level of global uncertainty due to a looming interest rate hike by the US Federal Reserve remained high, which could threaten the Indonesian currency toward further depreciation when capital outflows occurred.

BI feared a rise in the Fed'€™s interest rate could spark massive capital outflows from emerging countries, including Indonesia. In fact, foreign funds have begun to decline since early this year, as reflected by BI'€™s latest data on capital flows.

'€œWe have chosen to maintain investors'€™ confidence that Indonesia'€™s yield will remain attractive. It is difficult to guess market reaction, so we decided to shift the quantity of money by lowering GWM rather than change the pricing of money through a rate cut,'€ he said.

Speaking during BI'€™s annual Bankers'€™ Dinner recently, Vice President Jusuf Kalla expressed his strong criticism toward BI'€™s tight monetary stance, which he said went against the government'€™s pro-growth economic policy although the central bank, with its independence, could determine its own policy.

Solikin said the central bank had projected bank loan growth would reach around 12 to 14 percent next year, which also included its calculation that the cut in primary reserve requirement would inject additional liquidity of around Rp 18 (US$1.3 billion) to Rp 23 trillion into the banking system, which banks could use to boost lending.

'€œThe additional liquidity will help banks increase their loans by around 0.6 to 1 percent, but the exact amount will depend on each bank'€™s capacity to absorb the funds,'€ he said.