B

ank Indonesia (BI) will continue to prioritize rupiah stability over boosting economic growth in spite of calls for the central bank to conduct more interest rate cuts to stoke the economy.

The central bank earlier this month cut its key lending rate for the first time in a year by 25 basis points to 7.25 percent as it has started to see room for easing after a two-year tightening mode in monetary policy that saw rates rise from 5.75 percent in 2013 to 7.75 percent in 2014.

But as many '€” from economists and business players to Vice President Jusuf Kalla '€” called on BI to further cut its rates to support the economy, BI senior deputy governor Mirza Adityaswara dismissed such a notion, saying that a series of rate cuts did not always boost economic growth.

'€œIf last year or two years ago BI had lowered its rate amid financial turmoil, would the economy have picked up? No. We would have triggered greater instability instead,'€ Mirza told The Jakarta Post in a recent interview.

BI'€™s stability-over-growth stance was meant to support the nation'€™s rupiah amid global financial market turmoil that saw the currency depreciate from around Rp 9,700 against the US dollar in 2013 to Rp 14,000 in 2015.

The central bank argued that if key rates had been lowered during that period, pressure would have mounted on the rupiah and the nation'€™s financial market, creating instability instead of boosting economic growth through lower bank lending rates.

'€œThere is no growth without stability. In whatever condition, stability is important,'€ he said, when commenting on calls for more rate cuts to jump-start the lagging domestic economy.

Many blamed the decelerating economy '€” with gross domestic product (GDP) falling from 5.58 percent in 2013 to 5.02 percent in 2014 and 4.73 percent as of the third quarter of 2015 '€” in part on BI'€™s hawkish stance.

But now that BI has acknowledged that the economy has shown some improvement over to the 2013-2015 period, including lower inflation and a narrower current account gap, the central bank has eased its monetary policy stance.

However, BI would carefully assess the situation before taking more loosening measures, Mirza said, adding that a slowing Chinese economy and the anticipation of another rate increase in the US were two key risks on which the central bank kept a close watch.

China, which is one of Indonesia'€™s biggest trading partners, recently announced a further GDP slip. The economy only expanded by 6.9 percent in 2015, the lowest rate since 1990, Bloomberg reported.

With regard to the US'€™ Federal Funds Rate, Mirza said the market was now anticipating two more hikes this year, as opposed to four hikes mentioned in the Federal Reserve'€™s guideline.

'€œAll of these will affect emerging markets, including Indonesia. They may also influence the exchange rate, while our dependence on foreign exchange is still high,'€ he said.

According to Mirza, the central bank may not necessarily slash its key rate again in its attempt to ease monetary policy, as other tools were also available.

Prior to the January cut, BI already introduced several macroprudential measures and lowered the reserve requirement ratio (GWM).
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