Bank Indonesia Delivers Rupiah Boosting Compromise as Rate Held

Indonesia’s central bank Governor Agus Martowardojo showed his commitment to helping a faltering economy, and he did it without interest-rate cuts that would undermine the rupiah. The currency and stocks rose.

Bank Indonesia will loosen lending rules to support growth, the governor said in Jakarta Tuesday, even as he kept the reference rate at 7.5 percent as forecast by 15 of 18 economists surveyed by Bloomberg News.

“To keep the economic growth momentum, Bank Indonesia has loosened macroprudential policy,” the authority said in a statement. It will raise the amount that first-time house buyers are allowed to borrow as a proportion of the property’s value by 10 percentage points, Deputy Governor Halim Alamsyah said.

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.

“They will probably do something, but it’s not the magic bullet the economy needs,” said Gareth Leather, an economist at Capital Economics Ltd. in London, referring to the looser lending rules. “The main concern was still the high level of inflation. There would have been questions over credibility if the bank had slashed rates.”

Rupiah Recovers

The rupiah reversed declines after the central bank resisted pressure to cut rates, rising more than 0.1 percent to 13,118 against the dollar in Jakarta as of 3:59 p.m., according to prices from local banks. It has fallen more than 5 percent against the dollar this year, the worst performer among major Asian currencies.

Indonesian stocks gained on the growth measures, led by banks. The construction, property and real estate index also climbed. Easing macroprudential policies will boost economic growth by 0.1 to 0.2 percentage point and increase bank loans by 80 trillion rupiah ($6 billion), the central bank said.

Banks meeting targets on lending to small and medium enterprises and on bad debt levels will be allowed to increase their liquidity-funding-ratio to 94 percent, Alamsyah said. He was referring to what is currently known as the loan-to-deposit ratio, which stands at as much as 92 percent. Bank Indonesia also said it will soon revise the downpayments required on automotive loans.

“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.

Policy Pressure

Bank Indonesia also kept the lending facility rate at 8 percent. The authority held the rate it pays lenders on overnight deposits, known as the Fasbi, at 5.5 percent.

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.

Bank Indonesia said Tuesday inflation may be about 4.2 percent this year, while the current-account deficit may be 2.8 percent of gross domestic product.

“Monetary policy is being kept tight just when growth is slowing significantly, setting the scene for further tensions between the government and the central bank,” said Nicholas Spiro, managing director at Spiro Sovereign Strategy in London.

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