W

hile bankers and economists warned that Bank Indonesia’s (BI) decision to cut its benchmark interest rate would not have much benefit for the economy if other, fundamental, issues were not resolved, consumers and businesspeople have welcomed the move.

For 28 year-old Daniel Aditya, a lower interest rate on his mortgage will do much to help his financial situation as his wedding approaches.

“If the interest rate decreases it will ease my burden, given that the value of the house could double by the time I pay off my mortgage,” said the employee of a private firm living in Tangerang, Banten, on Wednesday.

Nina Dwiantika, 28, is planning to apply for a mortgage this year amid a low-interest and affordable down-payment environment.

BI made the surprise move on Tuesday to cut its benchmark rate — the BI seven-day reverse repurchase (repo) rate — by 25 basis points (bps) to 4.5 percent, after holding it unchanged for nine months in a row in the face of the risk of another United States Federal Reserve rate increase, now postponed to December.

BI took advantage of the benign inflation rate the country recorded up to July, an under-control current account deficit and the reduced risk of the Fed’s monetary policy.

The rate cut reflects BI’s confidence in the economy’s relatively stable and strong fundamentals, Indonesia Employers Association (Apindo) chairman Hariyadi B. Sukamdani said.

“Furthermore, the lower rate will push banks to also reduce their [interest] rates,” he said. “The lower rates [...] will encourage us to [apply for] investment loans for expansion.”

Loan disbursement growth slowed to 7.8 percent year-on-year (yoy) in June, down from the 8.7 percent booked in May. Deposit growth also cooled to 10.3 percent yoy in June compared to 11.2 percent in May.

The sluggish loan disbursement forced BI to revise down its loan growth target to between 8 percent and 10 percent, from 10 percent and 12 percent, this year. Deposit growth, at the same time, is expected to be in the range of 9 percent to 11 percent.

Economic growth, meanwhile, also stagnated at 5.01 percent in the second quarter versus the 5.18 percent recorded in the corresponding period last year.

The government hopes to achieve 5.2 percent economic growth this year and 5.4 percent in 2018.

The policy-rate easing, BI Governor Agus Martowardojo told a press conference on Tuesday, was aimed at creating optimum scope for banks to support the national economic recovery.

Bankers, however, argued that a lower policy rate alone would be insufficient to boost the country’s banking sector, and eventually the economy.

“Theoretically, the benchmark rate cut is expected to boost real-sector growth, or at least to have a psychological impact,” private lender OCBC NISP president director Parwati Surjaudaja wrote in a text message. “What’s needed by the banking industry at this time is political stability and an acceleration in real-sector growth, including an acceleration of the government’s program realization.”

State-owned lender Bank Tabungan Negara (BTN) director Iman Nugroho Soeko expressed hope that BI could further gradually lower the primary reserve requirement (GWM) — the minimum funds banks must hold as a reserve at the central bank — to enable banks to channel more funds as loans, especially to infrastructure and other priority government projects.

Bankers agreed that issues that needed to be addressed soon included bad loans, the ratio of which to total debt increased to 3 percent in July from 2.96 percent in June.

Private lender Bank Central Asia (BCA) president director Jahja Setiaatmadja advised the government to focus on strengthening people’s purchasing power because loan demand would remain sluggish if consumers continued to hold back on spending.

Economists also expressed doubts over the policy rate impact on the real sector.

“We did and still doubt that another 25bps, or even 50bps, [rate cut] will have much of an impact on the real sector,” DBS Bank economist Gundy Cahyadi wrote in a research note.

“It seems that interest rates may not be the real issue here,” Gundy said.

Meanwhile, Indonesia Chamber of Commerce and Industry (Kadin) chairman Rosan P. Roeslani said the monetary policy should translate into lower lending rates so that it could directly affect the real sector.

“After this, what fiscal policy will drive the economy? Because the undeniable fact is that there is a slowdown in all sectors,” he said, adding that his team had conveyed their proposed fiscal policy, including tax cuts, to Finance Ministry officials.

He said consumer confidence needed to improve as the country’s economy relied on household spending, which accounts for more than half of Indonesia’s gross domestic product (GDP).