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Bank Indonesia may pause easing amid rupiah drop
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Guardians of monetary policy: Bank Indonesia deputy governor Perry Warjiyo (left), governor Agus Martowardojo (second left), senior deputy governor Mirza Adityaswara (second right) and deputy governor Hendar speak at a press conference at the central bank office in Jakarta on Nov 17. (JP/Anton Hermansyah)
T
he central bank may pause the ongoing easing cycle that is aimed at spurring economic growth, as demand remains weak and global uncertainties put pressure on the rupiah.
BI senior deputy governor Mirza Adityaswara said Thursday the central bank had done “enough” easing that is “accommodative” to support economic growth. However, weak demand poses a major challenge for policy transmission.
“Monetary relaxation from the monetary authority has already been enough,” Mirza told journalists. “Monetary policies have been accommodative. But the demand has not bounced back to the normal level in 2012.”
BI has cut the nation’s benchmark interest rate six times this year to reach 4.75 percent at present, on top of other monetary easing policies, to help propel growth that weakened to a six-year low level of 4.79 percent in 2015. The board of governors will meet for a policy rate decision next week.
Although the economy has slightly recovered to grow 5.04 percent so far this year, annual bank lending growth touched a seven-year low level of 6.5 percent in September, recovering to 7.5 percent in October.
“If we want to do more easing, the macro numbers should be justified, especially the inflation figure needs to justify [the easing move], because we are facing other countries such as the US which will see higher interest rate. So our real interest rate should remain in an attractive position for investors,” Mirza said.
Lowering the benchmark seven-day reverse repo rate would narrow its gap with Indonesia’s inflation rate, creating a lower interest rate that makes Indonesian assets less attractive for financial market investors. Annual headline inflation was at 3.58 percent in November, in line with BI’s target.
Meanwhile, the rupiah has suffered from selling pressure in the past month as funds buy US assets in expectation of greater inflation and higher interest rates under the administration of US president elect Donald Trump.
Against the greenback, the rupiah has dropped more than 2 percent during the month of November, when the US election took place, depreciating to Rp 13,555 per US dollar by the end of the month from Rp 13,047 in the beginning. The same trend was only seen among other emerging markets.
“The volatility of financial markets limits room for BI to loosen further,” Bank Mandiri’s senior financial market analyst Rully Arya Wisnubroto wrote in a recent research note.
Meanwhile, banks have limited room to follow the central bank’s downward interest rate movement in the past year because their bad loans are increasing amid global economic uncertainties, he said.
“The most important thing for banks is to prioritize the stability of banking indicators, including asset quality, liquidity and capital adequacy, over profitability and credit growth,” Rully said.
Vice President Jusuf Kalla, a businessman by trade, has a different view. He says Indonesia needs a lower interest rate to support investment, which accounts for almost a third of Indonesia’s economy, as local banks are still offering too high of rates.
“If Malaysia’s lending rate is at 5 percent, Thailand 7 percent, and we’re still 11 percent, how are we supposed to compete? We already lost by that measure. Hence, we should bring down rates by all means, be it through [government] regulations or monetary [tools],” said Kalla.
The government cut lending rates for its sponsored micro loan (KUR) program this year to 9 percent from 12 percent last year and 22 percent previously, aiming for Rp 100 trillion disbursement in 2016.
Institute for Development of Economics and Finance (INDEF) economist Didik J. Rachbini said a lot of policies issued by the government and the monetary authority to stoke the economy had either worn out or had little effect on economic activities.
“Because the external factors impede. That’s why, as Pak Kalla said, the domestic strength needs to be pushed,” he added. The global economy is expected to slow to 3.1 percent this year from 3.2 percent last year, as the world’s top economies US, China and the Euro zone remain sluggish, according to the International Monetary Fund (IMF).
