Indonesia Central Bank Maintains Rates, Foresees ‘Limited’ Growth Gains – Reuters

By Nilufar Rizki and Gayatri Suroyo

JAKARTA – On Thursday, Indonesia’s central bank decided to maintain its benchmark interest rate, defying expectations for a fifth cut this year, emphasizing that previous easing measures are starting to benefit the sluggish economy.

The 12-month reference rate was kept steady at 6.50 percent, contrary to the predictions of 11 out of 16 economists surveyed, who anticipated a 25 basis point reduction.

Starting next month, Bank Indonesia (BI) will transition to using the 7-day reverse repurchase rate as its benchmark, which was also maintained at 5.25 percent during Thursday’s meeting.

Efforts to ease rates have been targeted at stimulating growth, which fell to 4.8 percent last year—the lowest level since 2009.

The change in the benchmark, announced in April, aims to enhance the transmission of monetary policy to the market, potentially amplifying the effects of the easing cycle.

BI noted improvements in transmission and anticipates that growth for the April-June period will show only "limited" improvement compared to the disappointing 4.92 percent reported for the first quarter. The second quarter economic data is set to be released on August 5, and BI maintained its full-year growth forecast at 5.0-5.4 percent.

Juda Agung, BI’s executive director of economic and monetary policy, indicated that while there is still room for further monetary loosening, the decision against cutting rates on Thursday was influenced by the impact of earlier cuts, which have decreased both commercial banks’ deposit and lending rates.

“Looking ahead, we are assessing macroeconomic stability and economic growth, but the room for easing is still there,” Agung stated.

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Economist Vaninder Singh from RBS, who had predicted a rate cut, still expects a 50 basis point reduction by year-end, citing a significant decrease in Indonesia’s domestic and external vulnerabilities.

Prior to Thursday’s decision, BI had reduced its main policy rate four times—totaling a 1 percentage point decrease—along with two cuts to banks’ reserve requirement ratios and modifications to lending rules to boost liquidity for commercial banks.

However, despite the lower rates, lending growth remained disappointing. As of May, bank loans increased by only 8.3 percent annually, slightly faster than the 8 percent growth seen in April and well below the banks’ target of a 12.5 percent increase for the year.

BI reiterated that the government’s new tax amnesty program is expected to provide banks with increased liquidity and stimulate economic growth. The amnesty, which offers low tax rates for taxpayers who declare previously undisclosed assets, aims to reclaim billions of dollars in Indonesian funds held overseas.

Agung stated that the amnesty is anticipated to result in 560 trillion rupiah repatriated to Indonesia.