Indonesia central bank seen cutting key rate again to try to spur growth

Indonesia’s central bank on Thursday is expected to make its fifth policy rate cut this year as it tries to help lift annual growth back above 5 percent.

Eleven of 16 economists polled by Reuters said Bank Indonesia (BI) will cut the benchmark 12-month reference rate BIPG by 25 basis points to 6.25 percent. The other five predict a hold.

The four cuts this year have reduced the benchmark by 1 percentage point to 6.50 percent

In the first quarter, annual growth was a disappointing 4.92 percent. In 2015, the rate was 4.8 percent, the lowest since 2009. BI projects 5.0-5.4 percent for this year.

Economic growth may not have improved in the second quarter, Governor Agus Martowardojo has said, as weak global growth continued to affect Southeast Asia’s largest economy. Second quarter data will be announced on Aug. 5.

Many say BI’s rate cuts have yet to aid growth as commercial banks have not trimmed lending rates fast enough. Loan growth in May was 8.3 percent, below BI’s outlook for 12 percent growth this year.

ANZ economists said the high lending growth target necessitates further rate cuts and it forecast BI on Thursday to not only cut the reference rate, but also the rate charged to commercial banks for borrowing money overnight and banks’ reserve requirement ratio.

“There is ample space for policy easing, provided for by the Fed’s dovish tone and still benign inflation outlook,” ANZ said.

POLICY TOO LOOSE?

BI Deputy Governor Perry Warjiyo, citing the same factors, said last month there’s still room to loosen monetary policy.

Annual inflation rate was 3.45 percent in June, inside BI’s 3-5 percent target band.

Deutsche Bank has warned against monetary policy being too loose.

“Our worry is that while there may be reasonable room for one more rate cut, if Q2 growth is not well above 5 percent, there will be pressure to cut more,” it said in a note, adding that BI’s easing cycle in the past led to overheating and worsening of external balances.

Among economists who think BI is better off keeping the benchmark steady is Gundy Cahyadi of DBS in Singapore, who said a rate cut may not improve loan growth as underlying demand for borrowing remains weak.

To better guide commercial banks’ rates, BI next month will fully adopt the 7-day reverse repurchase rate IDCBRR=ECI as its benchmark policy rate next month. The reverse repo rate is currently 5.25 percent.

Source: Reuters