You are here
Indonesia decision guide: rate cuts back in play to spur growth
[JAKARTA] Interest rate cuts are once again on the table in Indonesia.
With inflation and credit growth slowing, central bank Governor Agus Martowardojo has spurred speculation he may resume policy easing to give a boost to Southeast Asia's biggest economy.
Bank Indonesia has been on hold since its last reduction in October, but with the threat of capital outflows from higher US interest rates lessening, policy makers in Indonesia may be ready to ease again.
While most of the 28 economists surveyed by Bloomberg predict Martowardojo and his board will keep the benchmark rate at 4.75 per cent, six are predicting a 25 basis-point cut on Tuesday. That's the most number of economists calling for a reduction since the last move in October. Others, like ING Groep NV and Australia & New Zealand Banking Group, predict a move later this year.
Here are some of the arguments for and against a rate cut and other possible measures the central bank can take to ease policy:
WHY CUT NOW?
Consumer-price growth slowed to 3.9 per cent in July from 4.4 per cent in the previous month, remaining comfortably within the central bank's 3 per cent to 5 per cent target band. Food prices rose at their slowest pace since at least January 2014, indicating moderate pressures from this key category.
"It doesn't feel like there are any imminent price pressures but at the same time there is a realisation that growth needs to be encouraged," said Rahul Bajoria, a senior economist at Barclays Plc in Singapore, who predicts a rate cut on Tuesday. "Is there room to cut rates by 50 basis points over the next six to 12 months? Yes, sure, as long as inflation remains under control and it looks like it is."
Economic growth is another reason the central bank may want to cut. While the economy grew at a respectable pace of 5 per cent last quarter, growth is still well short of President Joko Widodo's 7 per cent goal set when he took office three years ago. That's despite six interest rate cuts last year.
The lower benchmark rate hasn't translated into stronger credit growth. Bank loans rose 7.8 per cent in June from a year ago, down from 8.8 per cent in the previous month and compared with an average growth of more than 10 per cent two years ago.
WHY STAY ON HOLD?
Bank Indonesia has been wary of triggering further weakness in the currency by cutting interest rates at a time when the US is tightening policy. The rupiah's relative stability this year - it's gained 0.9 per cent against the dollar since the beginning of January - has helped to keep inflation pressures at bay.
"The rupiah has underperformed its regional counterparts this year, which in a way is a policy easing, even if the impact on growth is likely to be limited as export growth of manufactured goods remains sluggish," said Gundy Cahyadi, an economist at DBS Holdings in Singapore. "Bank Indonesia is set to reiterate its commitment to maintain financial system stability, and the rupiah versus the dollar in particular."
Bank Indonesia may wait to see if forthcoming economic data justify lowering interest rates further. Mr Agus said earlier this month policy makers "aren't closed to the possibility of easing" if inflation remains manageable, the currency is stable and the data is supportive.
"Current conditions allow some leeway," said Joey Cuyegkeng, an economist at ING. "But confirmatory data may be needed to make BI more confident. We believe that lower August inflation is necessary for a September move."
OTHER EASING OPTIONS?
The central bank could opt to tweak other measures to provide stimulus to the economy without reducing its benchmark interest rate. Among those are targeted macro-prudential easing, such as lowering the loan-to-value ratios for housing or reducing down payments for car loans, said Lavanya Venkateswaran, an economist with Nomura Holdings Inc. in Singapore.
Another tool available to policy makers is the reserve requirement for lenders. The central bank has already loosened rules this year on the amount of money commercial lenders must hold in reserves on a daily basis, allowing them more flexibility in managing liquidity.
Since the beginning of July, banks have been allowed to hold a daily minimum of 5 per cent in reserve, as long as the average over two weeks is at least 6.5 per cent.
"We are basically of the view that BI will leave its policy rate unchanged and will resort to other options to support growth," Mr Venkateswaran said.