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BI cuts rate again to spur economic growth

Dody Budi Waluyo (Antara)Bank Indonesia (BI) is continuing its easing policy in a bid to help spur the country’s lower-than-expected economic growth, leaving narrower room for a further rate cut this year amid looming external risks from the policies of the United States’ Federal Reserve

Prima Wirayani (The Jakarta Post)
Jakarta
Sat, September 23, 2017

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BI cuts rate again to spur economic growth

Dody Budi Waluyo (Antara)

Bank Indonesia (BI) is continuing its easing policy in a bid to help spur the country’s lower-than-expected economic growth, leaving narrower room for a further rate cut this year amid looming external risks from the policies of the United States’ Federal Reserve.

After holding a two-day Board of Governors’ meeting, the central bank announced on Friday its decision to lower its policy — seven-day reverse repurchase (repo) — rate by 25 basis points to 4.25 percent.

This is the second rate cut this year and they have come over two consecutive months after BI kept the rate unchanged for nine months in a row.

The benchmark interest rate cut was consistent with this year’s forecast and the low realized inflation coupled with the controlled current account deficit (CAD) at a safe level, BI executive director for monetary and economic policy Dody Budi Waluyo told a press conference on Friday.

“The rate cut is expected to support the current domestic economic recovery,” he said.

Indonesia’s inflation rate hovered at 3.82 percent year-on-year (yoy) as of August, still within the government’s target of 4.3 percent this year.

Looming external risks, especially those arising from Fed policy, have been anticipated and factored by BI into the economic risks going forward, Dody added.

The Fed during its Federal Open Market Committee (FOMC) meeting this week implied a dovish stance but still saw room for a hike in its Fund Rate in December.

“Basically, [BI’s monetary] stance going forward remains neutral, which means the current interest rate is enough to bring inflation to this and next year’s target realization,” Dody said.

The government has forecast 2018’s inflation at 3.5 percent.

Indonesia’s economy expanded by 5.01 percent during the first half of this year as consumer spending slowed and government spending also weakened.

Given this fact, the government has set a growth outlook of 5.17 percent by December from the targeted 5.2 percent of gross domestic product (GDP) expansion targeted previously.

It aims to achieve 5.4 percent economic growth in 2018.

Bank loan growth was also cooler than expected as it stood at 8.2 percent year-on-year in July as a result of rising bad debts, prompting the central bank to lower its growth projection to between 8 percent and 10 percent from its initial target of around 10 percent to 12 percent set earlier this year.

The banking industry’s non-performing loan (NPL) ratio, used to measure bad debts compared to total loans, increased to 3 percent in July from 2.86 percent in June.

“We see BI’s rate cut as a serious commitment to growth,” Mirae Asset Sekuritas Indonesia research head Taye Shim wrote in a text message.

“Among various reasons, the most important factor is that the government has limited options on the table to boost growth. And thankfully, global central banks’ monetary policy decisions are not imminent concerns, for now.”

Bank Central Asia (BCA) economist David Sumual expressed a similar view, saying the decision was taken just in time as a rate cut would be riskier in the fourth quarter when the Fed rate hike could occur.

“[Indonesia’s economic] fundamentals are generally all good but economic growth and consumption are still below the target,” he said by phone.

“I now see less room for further easing.”

Economists expected BI to hold its rate going forward while paying attention to reactions to the Fed policy rate decision before deciding on a more dovish or hawkish monetary stance next year.

“The central bank’s policy realization effectiveness is the main consideration for further decisions. Moreover, the external pressures will begin to intensify after several major central banks prepare to apply tighter monetary policies,” Maybank Indonesia economist Myrdal Gunarto wrote in a research note.

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