Bank Indonesia Plans Easier Lending Rules as Key Rate Held

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Indonesia’s central bank said it will loosen lending rules to support growth, even as it resisted pressure to cut interest rates.

“To keep the economic growth momentum, Bank Indonesia has loosened macroprudential policy” and will soon revise the loan-deposit-ratio reserve-requirement regulation, the loan-to-value policy for mortgage loans as well as downpayments on automotive loans, Bank Indonesia said in a statement in Jakarta Tuesday, without giving details.

Governor Agus Martowardojo and his board kept the reference rate at 7.5 percent, as forecast by 15 of 18 economists surveyed by Bloomberg News. The authority also held the rate it pays lenders on overnight deposits, known as the Fasbi, at 5.5 percent.

Policy makers are grappling with conflicting pressures in managing Southeast Asia’s biggest economy -- the need to stem a growth slowdown while countering inflation risks and a currency-weakening current-account deficit. Martowardojo said May 7 the central bank will keep a tight policy stance, the same day Vice President Jusuf Kalla said Indonesia will cut rates gradually.

“Monetary easing may prove to be counterproductive as it may cause the rupiah to depreciate and thereby reduce domestic purchasing power,” David Sumual, an economist at PT Bank Central Asia in Jakarta, said before the decision. Adjusting other policies like relaxing lending curbs may be appropriate “in a bid to give a sort of buttress to economic growth,” he said.

Rupiah Performance

Indonesia’s rupiah has fallen more than 5 percent against the dollar this year, the worst performer among major Asian currencies. It pared declines after the decision, trading little changed at 13,135 against the greenback in Jakarta as of 3:47 p.m., according to prices from local banks.

“Bank Indonesia will also continue to strengthen coordination with the government not only in terms of controlling inflation and managing the current-account deficit, but also by accelerating fiscal stimulus to boost economic growth,” it said Tuesday.

Bank Indonesia also kept the lending facility rate at 8 percent. While the reference rate is the central bank’s stated benchmark, the deposit facility rate known as Fasbi and the lending facility rate are watched by markets as other indicators of monetary policy.

Mounting Pressure

The authority has adjusted the Fasbi before the reference rate in the past, or changed reserve requirements or other liquidity tools while holding the benchmark.

Pressure for monetary easing mounted in recent weeks after data showed economic growth slowed to 4.7 percent in the first quarter from a year earlier, the weakest pace since 2009 and well below President Joko Widodo’s target of lifting annual growth to 7 percent within his term.

Two days after the May 5 economic report, Vice President Kalla was asked by reporters if it was time to cut rates.

“To stabilize” the situation, rates will be “gradually cut” later, Kalla told the reporters after speaking to investors, bankers and businessmen at a conference. If reductions aren’t gradual “it will dissuade people from saving money,” he said.

‘Tight’ Stance

Speaking at the same conference less than two hours later, Governor Martowardojo told the audience that “Bank Indonesia will maintain a tight monetary stance to anchor inflation expectations and manage external pressures.”

The risk of capital outflows in the event of an anticipated U.S. rate increase later this year and a persistent current-account shortfall are weighing on the rupiah, while inflation accelerated to 6.8 percent in April, versus an end-year target of 3 percent to 5 percent.

“BI is focused on growth, but the risk for the rupiah is too great now to cut rates,” Dian Ayu Yustina, an economist at PT Bank Danamon Indonesia in Jakarta, said before the decision. “If the rupiah remains above 13,000 against the dollar, BI won’t cut.”

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