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Bank Indonesia to continue easing after rate cut
Bank Indonesia (BI) will continue its policy easing to help improve the domestic economy after cutting its benchmark rate for the fifth time this year
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Bank Indonesia (BI) will continue its policy easing to help improve the domestic economy after cutting its benchmark rate for the fifth time this year.
The central bank slashed its seven-day reverse repo rate by 25 basis points (bps) to 5 percent on Thursday and reduced its deposit and lending rates by the same amount to 4.25 percent and 5.75 percent, respectively.
BI Governor Agus Martowardojo said in a press conference that it saw the need for further easing to compensate for the weak global economy.
“We are in an easing stance and [the easing] will continue until year-end, even until early next year provided that all [economic] indicators are maintained,” he said.
The easing is especially needed to jump-start bank loans, which only grew by 7.7 percent year-on-year (yoy) as of July, even though BI had cut its rate by a total of 100 basis points (bps) in four previous board of governors meetings and lowered its primary reserve requirement (GWM) by 150 bps this year.
He acknowledged that BI’s monetary transmission to the banking industry had been slow and partly attributed it to banks’ decision to be cautious in disbursing credit due to rising bad debt or non-performing loans (NPL), with gross NPL ratio standing at 3.2 percent as of July.
The latest rate cut is expected to help achieve this year’s loan growth estimate at between 7 percent and 9 percent, which BI has lowered from its previous projection of 10 to 12 percent as a result of a lagging economy.
BI maintains its conviction that the move, when combined with recent macroprudential measures, will also strengthen the government’s efforts to spur sustainable economic growth.
Thursday’s outcome was widely expected and in line with most economists’ forecast. Sixteen of 19 analysts polled by Bloomberg predicted the 25 bps cut in the central bank’s policy rate.
Agus said most macroeconomic indicators had been supportive amid the weak global economy, particularly benign inflation, manageable current-account deficit and stable exchange rate. OCBC economist Wellian Wiranto wrote in a research note that the US Federal Reserve’s decision to hold its rate on Wednesday (Thursday Jakarta time) might have given BI room to relax its stance.
“From the perspective of central bankers of Indonesia [and no doubt, other emerging markets], this has inadvertently opened up space for them to do what they think is needed for their economies without having to watch their backs all the time.”
OCBC estimates there is still a chance that BI will go further along the easing path by trimming the rate at least one more time by the end of this year.
JPMorgan economist Sin Beng Ong predicted two more rate cuts by the first half of 2017, if not earlier.
“Thus, we expect the fiscal impulse to remain modest, and thus now project monetary policy will ease another 50 bps to bring the seven-day repo rate to 4.5 percent by 1H17 and possibly earlier after today’s cut.”
JPMorgan points out several factors that facilitate the stance. The first is a benign inflation trajectory, hugging the lower bound of the 3 to 5 percent target range.
“The other two factors relate to the balance of payments. External financial conditions have supported capital inflow, which have helped stabilize the currency. The other more idiosyncratic factor has been the inflow from the tax amnesty program.”
Meanwhile, unlike OCBC and JPMorgan, UOB estimates that BI will likely hold its horses.
“While factors including low inflation, weak growth and a relatively stable exchange rate may keep the option of a further rate cut open, we are inclined to think that the central bank will not want to test the limit. As such, BI will likely maintain the benchmark rate at 5 percent, unless economic data deteriorates,” said UOB economist Ho Woei Chen.
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