BI expects higher GDP growth from looser mortgage rules, despite rate hikes

Jakarta

THE Indonesian central bank's plan to ease mortgage rules would add marginally to economic growth this year, despite higher interest rates, a senior official said on Monday.

Filianingsih Hendarta, an assistant to the governor of Bank Indonesia (BI), told reporters: "The property sector has a large multiplier effect."

She said it could affect industries ranging from cement to advertising, and add about 0.04 percentage point to growth this year.

Bank Indonesia's outlook for 2018 gross domestic product (GDP) growth remained at between 5.1 and 5.5 per cent, which takes into account the rate hikes and looser mortgage rules, she said. Growth in 2017 was 5.07 per cent.

BI has raised its benchmark rate by a total of 100 basis points in six weeks; the third and latest hike in that period came on Friday, as it ramps up efforts to defend the rupiah and stem a sell-off washing across emerging markets.

To offset the impact of higher interest rates on GDP growth, the central bank also announced a plan to ease rules on home loans.

Effective Aug 1, banks may offer mortgages with no downpayment for first-time home buyers, scrapping a 15 per cent requirement currently in place. BI will also ease a rule preventing the use of bank loans to fund partially-built houses.

BI expects mortgage loans to grow over 13 per cent annually this year, pushing overall credit growth to 12 per cent for 2018, Ms Hendarta said.

Loan growth was 10.26 per cent in May.

"People's consumption in the property sector has increased and households' repayment ability remains relatively high," she said, adding that mortgage takers are not sensitive to higher interest rates, though they respond well to changes in downpayment rules.

Tamara Henderson from Bloomberg Economics said: "Bank Indonesia is supporting domestic demand by relaxing loan-to-value rules, which come into effect on Aug 1.

"Even if the rupiah stabilises in the short-term, we expect more rate hikes as long as the current account deficit continues to widen and the Federal Reserve keeps raising interest rates."

Finance Minister Sri Mulyani Indrawati has said the government is willing to accept slower economic growth as a trade-off for stability.

While the economy has been growing at about 5 per cent, it is well below historical levels and lower than the 7 per cent President Joko Widodo had targeted when he took office. Inflation is also low by Indonesian standards, with consumer prices rising 3.2 per cent in May.

Euben Paracuelles, an economist at Nomura Holdings Inc in Singapore, said the central bank's hawkish tone remains intact and the focus will shift to fiscal policy to provide support to the economy.

"There is scope for targeted macro-prudential measures to provide some offset," he said. "Importantly, I think this is when fiscal policy needs to do some more heavy-lifting to boost growth and they have scope for that too." REUTERS, BLOOMBERG