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BI holds benchmark rate, pushes for speedy loan consolidation
Bank Indonesia (BI) decided on Thursday to hold its seven-day reverse repurcharse rate at 4
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Bank Indonesia (BI) decided on Thursday to hold its seven-day reverse repurcharse rate at 4.75 percent as it waits for banks to complete loan consolidation amid financial pressure from overseas.
The central bank’s executive director for monetary and economic policy, Dody Budi Waluyo, said the ongoing loan consolidation had placed hurdles before BI’s monetary policy, slowing down its immediate effects.
Since January, the central bank has cut its benchmark rate by 150 basis points (bps) while the average interest rate of banks has only declined by 93 bps.
“Banks are still consolidating while firms are introducing efficiency measures. If these processes are already finished, firms will have more ability to pay back credit. Bank interest rates for loans will be lower and credit demand will pick up,” he said in a press conference.
A Reuters poll earlier this week found that 15 analysts surveyed predicted that BI would keep the benchmark rate unchanged at current levels. Of four analysts with longer-term views, three said they expected BI to hold rates for the rest of the year while one predicted a 25-basis-point hike.
According to BI data, the banking industry’s non-performing loan (NPL) ratio stood at a level of 3.2 percent in February, slightly higher than the 3.1 percent recorded the previous month.
The average capital adequacy ratio, meanwhile, stood at 23 percent.
Loan disbusement showed signs of picking up with 8.6 percent year-on-year (yoy) growth recorded in February, compared to 8.3 percent in January.
A notable pressure is currently coming from the United States as the US Federal Reserve (Fed) plans to push “balance sheet normalization”, through which it will reduce investment in securities.
Fed currently has US$4.5 trillion on its balance sheet, $3.5 trillion of which consists of treasury notes and mortgage-backed securities. As of Wednesday, the Fed held $2.46 trillion in treasury notes and $1.77 trillion mortgage-backed securities.
With the normalization policy, global markets will absorb the securities sold by the Fed and then global liquidity will be transferred to the US economy, Dody said.
For Indonesia, therefore, there will be a possible weakening of the rupiah against the greenback. Combined with the Fed’s plan to “normalize” the interest rate, this will create pressure for BI to increase its policy rate.
Dody, however, argued that there were no clear details about the plan. The Fed, meanwhile, has not explained when the securities will be released, how much will be released, and what kinds of securities will be released.
“We still have to wait for the Fed’s signals. Currently, BI’s stance is neutral-biased and we are ready to increase the policy rate if the Fed increases its rate,” Dody said.
For the domestic side, BI said it expected to see the economy grow at a slower pace than expected in the first three months of the year, referring to some indicators such as sluggish domestic consumption.
Providing an example, BI spokesperson Tirta Segara said motorcycle sales in the first quarter were down 6.84 percent yoy to 1.4 million motorcycles.
“We expect the economy to revive again in the second quarter supported by incoming investment and exports, which will be driven by surging commodity prices,” Tirta said.
United Overseas Bank (UOB) global economics and market researcher Ho Woei Chen said that the BI stance to hold its policy rate was parallel to analysts’ expectation.
Indonesia may get a boost from the global economy, which has improved of late. As a result, Indonesia’s shipments grew by 20.8 percent yoy in the first quarter, compared to 14 percent yoy in the same period last year.
However, Ho mentioned that inflationary pressures remained as the government intended to increase the electricity tariff over the subsequent months. In January, inflation increased by 1 percent month-on-month after the government increased electricity, gas and fuel prices.
“The mitigating factor will be BI’s close monitoring of volatile food prices in the country. We are maintaining our full-year average inflation forecast at 4.2 percent,” he said in a research note.
