It takes two to tango — as the government issues economic stimulus packages, the central bank continues to ease monetary policy. Both hope that their measures will stoke growth in Southeast Asia’s largest economy.

Bank Indonesia (BI) on Thursday announced additional easing moves, including cutting the benchmark interest rate, called the BI rate, by 25 basis points (bps) to 6.5 percent — the fourth cut this year from 7.75 percent at the start of the year.

The seven-day reverse repo rate, which will replace the BI rate as the policy benchmark starting in August, has also been cut by 25 bps to 5.25 percent.

For businesses and consumers, the rate cuts are expected to transmit into lower bank interest rates and encourage businesses to borrow more and spur economic activity.

BI also relaxed the loan-to-value (LTV) ratio for mortgages, thereby requiring lower down payments from property buyers. Banks are also encouraged to increase lending, with the central bank narrowing the loan-to-financing ratio (LFR) range related to the minimum reserve requirement (GWM) to 80 to 92 percent, from 78 to 92 percent previously.

“The mixture of policies is expected to strengthen efforts to boost domestic demand in support of economic growth,” BI’s board of governors said in a statement issued after its two-day policy meeting ended on Thursday.

Indonesia’s economy grew by 4.79 percent in 2015, the slowest pace in six years, due to weak domestic demand and lower exports against the backdrop of a global economic slowdown. Bank loan growth slowed to 8 percent year-on-year (yoy) in April, compared with financial authorities’ expectations of 12 to 14 percent growth this year.

“BI believes that monetary and macroprudential policy easing will strengthen the government’s policies to stimulate sustainable economic growth by speeding up the implementation of structural reforms,” the policy statement reads.

The real economy and financial sector should work hand-in-hand to boost the country’s economy, said Coordinating Economic Minister Darmin Nasution. His office has issued 12 economic stimulus packages since September last year to cut red tape and attract more investment to the country.

“Further rate cuts in the future are possible if inflation remains in check,” said Darmin. Indonesia’s inflation was benign at 3.41 percent in May, well within authorities’ 3 to 5 percent target.

The government wants to jack up economic growth this year to 5.3 percent, primarily through infrastructure projects, but its cash-strapped budget faces challenges from lower-than-expected revenue.

OCBC Bank economist Wellian Wiranto highlighted the importance of teamwork between BI and the government in boosting domestic economic growth. “At a time when the 3 percent budget deficit limit curtails how much fiscal policy can do to help, that is especially helpful,” he wrote in a research note.

Maybank economist Juniman expressed a similar view, saying the tax revenue shortfall limited the government’s ability to construct infrastructure that was hoped to impact the real economy. “BI, from the monetary side, can improve people’s purchasing power by lowering loan rates so that business activities and the real sector will move,” he said.

Business players concur. The Indonesian Employers Association (Apindo) and Indonesian Chamber of Commerce and Industry (Kadin) welcomed the rate cut and expressed high hopes that it could impact the real economy.

Apindo chairman Hariyadi Sukamdani said the policy rate cut brought the country one step closer to realizing authorities’ dream of average single-digit bank lending rates, so as to make it more affordable for businesses and consumers to borrow from banks.

“Businesspeople are giving positive feedback to this. More people are encouraged to borrow more money in the economic slowdown,” Kadin advisory board member Chris Kanter said.
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