Indonesia cuts rates in bid to lift growth, lending

20-Feb-2016 Intellasia | Reuters | 6:00 AM Print This Post

Indonesia’s central bank, anticipating that US interest rates won’t be hiked until after June, on Thursday escalated its efforts to lift sluggish growth and lending by cutting a host of rates.

Bank Indonesia (BI) cut its benchmark interest rate BIPG by 25 basis points to 7.0 percent – this year’s second trim – and it chopped a reserve requirement on rupiah deposits by 1 percentage point to 6.5 percent.

“This is a bold and decisive move to accelerate the easing cycle, to insulate the economy against weakening external demand, lower commodity prices,” said economists Wai Ho Leong at Barclays in Singapore.

In its statement, BI said its moves were “consistent with greater room to ease monetary policy” given factors such as lower inflation than last year.

“The global economic recovery is expected to remain weak,” BI noted. “On the other hand, risk on global financial markets related to possible Federal Funds Rate (increases) has eased.”

Thirteen of 19 economists surveyed by Reuters predicted BI would cut the key rate basis points to 7.00 percent, following a trim in January of the same size.

The reserve ratio cut, which takes effect March 16, is expected to boost liquidity by 34 trillion rupiah ($2.52 billion), the central bank said.

David Sumual, economist at Bank Central Asia, said the “aggressive” ratio cut can help inject liquidity at a time the government is pushing infrastructure projects.

Parwati Surjaudaja, president director of OCBC NISP Bank, said the easing should help increase lending “however loan expansion is driven more by conducive macroeconomic conditions, not solely based on liquidity”.

Indonesia is not the only Asian economy easing policy to try to boost growth. Japan has introduced negative interest rates, Taiwan and Bangladesh have cut rates and others are expected to this year amid global growth worries.

For the last 10 months of 2015, BI kept rates unchanged as it battled high inflation and supported the country’s fragile rupiah IDR=.


Southeast Asia’s largest economy grew 4.8 percent last year, the fifth year of slowing growth and the weakest in six years. But growth accelerated in the final quarter in what many see as a sign of upward momentum.

Perry Warjiyo, a BI deputy governor, said Indonesia’s growth outlook had improved, and the economy was seen expanding 5.4 percent in 2016, compared with the previous forecast of 5.2 percent.

Warjiyo added that lowering interest rates and reserve requirements together would “make the effect stronger and faster” while stability would be maintained.

The rupiah weakened more than 10 percent against the dollar in 2015, making it emerging Asia’s second worst-performing currency.

This year, it has risen nearly 2.5 percent against the dollar while Indonesia’s stock market.JKSE has outperformed regional peers.

In a Reuters poll published Thursday, currency traders and analysts turned bullish on the rupiah for the first time since November 2014.

BI’s inflation target for this year, as in the past, is 3-5 percent. In January, inflation was 4.14 percent, significantly lower than the average during 2015 but higher than December’s 3.35 percent.

Wellian Wiranto, economist at OCBC Singapore, described Thursday’s actions as “a multi-front easing while the going is good”.

($1 = 13,490 rupiah)


Category: Indonesia

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