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BI cuts rates, relaxes lending rules to stoke growth
Perry Warjiyo (JP/Anggie Angela)Bank Indonesia (BI) has cut its key rate for a third consecutive month and relaxed down payment rules and intermediation requirements for banks to encourage more loans, boost economic activity and in turn stoke growth amid global risks
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Perry Warjiyo (JP/Anggie Angela)
Bank Indonesia (BI) has cut its key rate for a third consecutive month and relaxed down payment rules and intermediation requirements for banks to encourage more loans, boost economic activity and in turn stoke growth amid global risks.
The central bank on Thursday cut its monetary policy benchmark, the seven-day reverse repo rate, by 25 basis points (bps) to 5.25 percent. The lending and deposit rates were also slashed by 25 bps to 6 percent and 4.5 percent, respectively.
Down payment requirements for housing and vehicle loans will be reduced by between 5 and 10 percentage points (ppt) starting Dec. 2, BI announced. This will allow consumers to make a down payment of only 15 percent on motorcycle or car purchases, down from 20 percent and 25 percent required now. Environmentally friendly houses and electric vehicles can get an additional down payment relaxation of 5 ppt.
Furthermore, BI will broaden the scope of what banks can declare as deposits, so they can access an additional Rp 128 trillion (US$9.07 billion) in funds to provide more loans. The so-called macroprudential intermediation ratio (RIM), also known as the financing-to-deposit ratio, currently stands at 93.1 percent, nearing the central bank’s safe range of 84 to 94 percent that can discourage banks from offering loans.
“BI, since the beginning of the year, has directed all of its policies toward boosting the economic growth momentum, as well as taking a preemptive step against the impact of the trade tensions,” BI Governor Perry Warjiyo told a press briefing, referring to the ongoing trade war between the United States and China.
The latest efforts the central bank announced to stoke growth come after Indonesia’s economy slowed to the lowest level in two years, at 5.05 percent year-on-year in the second quarter. Loan growth, which had already decelerated to a one-year low of 9.9 percent in June, dipped further to 9.6 percent in July, led by a decline in consumer loans.
With BI already delivering a total of 75 bps in cuts so far this year, Perry said he hoped banks would follow BI’s move and slash their deposit and lending rates to facilitate more loan disbursement.
“With policy rates coming down, we are of the view that the LTV policy, coupled with easing on the RIM and banks’ liquidity, would drive both supply and demand for loans and therefore maintain the economic growth momentum,” said Perry.
The policy easing was also consistent with benign inflation and yields of domestic assets that remained attractive, he added.
The headline rate cut had been predicted by 21 of 28 economists polled by Bloomberg and comes hot on the heels of the latest rate cut by the US Federal Reserve.
Going forward, Perry said, the central bank would continue its accommodative policy mix in line with benign inflation, stability of the external sector and the need to spur domestic growth.
“Macroprudential easing would complement rate cuts to boost credit from both the supply and demand side,” said Bahana Sekuritas economist Satria Sambijantoro.
“The BI governor sounded alarmed about a potential slowdown in the Indonesian economy, as evinced by the deceleration of credit growth, and reaffirmed his commitment to use ‘all monetary policy tools’ to support economic expansion.
Center of Reform on Economics Indonesia research director Piter Abdullah said the accumulative 75-bps rate cut delivered by BI this year was “much needed to maintain our economic growth amid a global economic slowdown”.
However, he regretted the government’s apparent conservative fiscal policy stance, with a lower fiscal deficit and higher tax revenue targeted next year, which did not complement BI’s accommodative stance.
The fiscal deficit is planned at Rp 307.2 trillion next year, equivalent to 1.76 percent of GDP. The figure is lower than the Rp 310.8 trillion fiscal deficit expected this year, equal to 1.93 percent to the GDP.
Tax revenue, meanwhile, is targeted to rise to Rp 1.86 quadrillion next year from the Rp 1.64 quadrillion expected to be collected by tax and customs authorities this year.
