Indonesia central bank holds rates, prepares for new benchmark

[JAKARTA] Indonesia's central bank on Thursday held rates for the first time this year, as expected, and some analysts see no further easing until it switches to a new benchmark rate in August.

Bank Indonesia (BI), which has been frustrated that banks have not lowered loan rates in line with its moves, said liquidity and consumption have started to improve in the wake of its easings.

On Thursday, BI kept the 12-month benchmark rate at 6.75 per cent, and left the seven-day reverse repo, which will become the new benchmark on Aug 19, at 5.50 per cent.

At this year's three previous monthly meetings, BI cut its benchmark by a total of 75 basis points. In November and February, it slashed its reserve requirement ratio by a cumulative 150 bps to make more funds available for lending. "The transmission of monetary policy through March had shown progress although it was not optimal," said Juda Agung, BI's executive director of monetary and economic policy, adding that deposit rates went down only by 37 bps and lending rates by 13 bps.

In February, annual loan growth slowed to 8.2 per cent, the weakest since 2009.

Capital Economics thinks BI will probably extend Thursday's easing pause until August, as it gets ready for the new benchmark. "Given that cuts in the reference rate are proving ineffective at getting commercial banks to lower their lending rates, there seems little point in cutting them any further," it said in a note.

BI unveiled details of auction changes while saying it will accumulate more bonds to conduct monetary operations under the new benchmark.

The government also wants banks to reduce the rate they charge companies to 9 per cent, from more than 12 per cent, to boost growth. It has said it is willing to accept lower return for all of the government's savings, including state firms'accounts, in order to cut banks' cost of fund. The government has also pushed BI to do more.

Economic growth showed signs of improvement in late 2015, but for the year was 4.8 per cent, the slowest since 2009 per cent.

Mr Agung said annual growth might improve to 5.1-5.2 per cent in the first quarter and could strengthen after June.

Nomura said in a note that BI may have room to further spur growth in the second half by cutting its benchmark rate 25 bps more.

After Thursday's decision, the rupiah eased 0.1 per cent to 13,150 per dollar. The rupiah has risen 4.8 per cent against the dollar this year on capital inflows.

REUTERS