Bank Indonesia (BI) has held its benchmark rate after four consecutive cuts, but it is continuing its monetary easing by relaxing bank reserve requirements, which is expected to add US$1.8 billion to bank liquidity to encourage more lending and spur economic activity.

BI kept the so-called seven-day reverse repo rate at 5 percent on Thursday, having cut the benchmark rate by 100 basis points (bps) since July to boost growth amid rising global risks.

“Monetary policy remains accommodative and is consistent with controlling inflation in the target corridor, maintaining external stability, as well as efforts to sustain domestic economic growth momentum against a backdrop of global economic moderation,” the board of governors’ statement reads.

Although Indonesia’s economic growth dropped to the lowest level in more than two years in the third quarter of this year to 5.02 percent, BI Governor Perry Warjiyo said the country’s economy was still sound as consumer spending was still growing as a result of strong spending among lower-income consumers, thanks to the government’s social aid disbursement.

The central bank, however, is continuing to ease its monetary policy to support the economy by lowering banks’ primary reserve requirement (GWM), which is the minimum amount of bank liquidity held at the central bank. The GWM for rupiah was cut by 50 bps to 5.5 percent for conventional banks and 4 percent for sharia banks.

Perry said the new policy, which will be effective as of Jan. 2, 2020, will free up Rp 26 trillion (US$1.8 billion) of bank liquidity so that lenders can boost loan disbursement in the future. The effect will be seen in banks’ increased liquidity in the first quarter of next year, which will translate into fiscal expansion and greater loan demand in the second quarter, he added.

“This is part of our forward-looking and preemptive measures to anticipate the tightening liquidity in the first quarter and also to support the banks so they won’t have to worry about liquidity when they disburse more loans in the second quarter,” said Perry.

The policy easing was taken as Indonesia’s loan growth further slowed to 7.89 percent in September after dropping to the slowest pace since January 2018 at 8.59 percent in August.

Perry said demand for loans from corporations had been weak, prompting the central bank to cut its loan growth target to 8 percent this year from 10 to 12 percent previously.

The new policy marked the second time that BI has lowered its GWM requirement. Previously, the central bank lowered its GWM requirement by 50 bps in June to 6 percent for conventional banks and 4.5 percent for sharia banks.

“Banks are currently left in a tight squeeze, so BI really needed to inject more liquidity as the previous one was not enough,” Center of Reform on Economics (CORE) Indonesia research director Piter Abdullah told The Jakarta Post in a text message.

Further lowering the GWM requirement could also have a greater and faster impact on liquidity and loan disbursement for banks, he added.

Bank Permata economist Josua Pardede said the earlier easing of the GWM requirement, along with the lower interest rate, had yet to have a major impact on loan disbursement as banks were still struggling to increase third-party funding.

“This has made banks reluctant to lower their interest rates for time deposits and loans as they need to attract in more money,” said Josua.

High interest rates, coupled with uncertain economic conditions, have unsettled businesses and dissuaded them from applying for loans for expansion.

BI’s extensive efforts to boost the country’s economy are still not enough, according to Josua, as he called on the government to also create fiscal relaxation measures that would increase the corporate appetite for expansion and boost loan demand amid the unfavorable economic situation.

Despite the ongoing global trade tensions, BI sees the potential of improving global economic conditions as many countries have made efforts to boost economic activity by loosening their monetary policies through lower interest rates, Perry said.

In the meantime, he continued, global financial markets seemed to have stabilized up until the third quarter of this year. This signaled that emerging markets, including Indonesia, would see more capital inflows in the near future.

“Economic growth is expected to regain upward momentum in the fourth quarter of 2019 on seasonal trends in line with fiscal expansion,” the board of governors statement states. BI projects economic growth to reach around 5.1 percent in 2019.

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