T

he central bank may need to slash its benchmark interest rate further to effectively boost economic growth, says powerful business group Apindo.

Hariyadi Sukamdani, chairman of the Indonesian Employers Association (Apindo), which represents business owners, said the central bank was supposed to cut its interest rate further after a 25 basis point cut (bps) on Thursday to 7.25 percent, thanks to positive momentum in the economy.

Annual inflation eased to 3.35 percent in December, the lowest since March 2010, providing room for Bank Indonesia (BI) to cut its rate to stoke growth in an economy that has slowed to levels unseen in six years in the past few quarters.

As BI cut its rate for the first time since February 2015 on Thursday, it also lowered deposit and lending facilities by 25 bps as well, to 5.25 percent and 7.75 percent, respectively.

The central bank'€™s decision came just hours after Jakarta was hit by a series of explosions and gunfire that killed several people, the worst attack of such kind in the capital since 2009.

'€œThe rupiah and the Jakarta Composite Index [JCI] have been resilient despite terrorist attacks. Both indicators have not necessarily plunged deeply when there was a sudden shock,'€ he said on Friday.

Share prices and the rupiah plunged sharply in the morning following the attack, but both rebounded in the afternoon. The local exchange'€™s JCI only dropped 0.5 percent to end the day at 4,513.18 after falling nearly 2 percent in morning trade, while the rupiah slightly weakened to 13,907 per US dollar at the end of the trading day after falling to Rp 13,980 in the morning.

Hariyadi said BI had ample room to reduce its key rate to 6.75 percent, or at least 7 percent if it was still considering several macroeconomic risks.

On Friday, BI Governor Agus Martowardojo said that the central bank still saw room for further monetary policy easing as it felt '€œpretty happy'€ with the development of the country'€™s economic fundamentals, especially following the increase of the US'€™ Federal Fund Rate on Dec. 16.

However, despite hinting at a possibility of a second rate cut, Agus insisted that macroeconomics and financial system stability would be key in determining just how far BI would relax its stance as external risks persisted, citing the slowing Chinese economy as an example.

At a gathering event held by the Financial Services Authority (OJK) on Friday evening, Vice President Jusuf Kalla expressed his appreciation toward the central bank'€™s decision and asked banks to cut their lending rates soon, saying that '€œbanks are responsible to change the current situation where people are accustomed to high lending rates'€.

Speaking in front of 700 executives of banks and financial service firms at the event, Kalla said the OJK'€™s campaign to promote capital market investment would not be effective as yields on the bourse competed with high time deposit rates offered by banks.

'€œThis has resulted in foreign investors controlling 65 percent of our capital market, meaning there is a danger [of volatility] to the country,'€ said the Vice President, who also owns a business grouping called the Kalla Group.

Contacted separately, several banking executives viewed that they would have ample room to reduce cost of funds, which in turn would help decrease lending rates and attract higher demand for loans.

OCBC NISP president director Parwati Surjaudaja and Bank Danamon finance director Vera Eve Lim said they were ready to reduce their cost of funds as the BI rate cut had provided more room for them to cut time deposit rates.

'€œIn general, loan growth last year was faster than third-party funds, but it was still at an acceptable level,'€ Parwati said.

On the other hand, Bank Rakyat Indonesia (BRI) finance director Haru Koesmahargyo said the lender had yet to plan for rate cuts as it was still monitoring liquidity in the market.
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