Bank Indonesia Under Pressure to Ease Policy: Decision GuideBy
More than third of economists forecast a cut, most since March
Policy makers may consider reducing macroprudential limits
Pressure is growing on Bank Indonesia to resume reducing interest rates following a two-month pause, as the economy braces for tighter U.S. monetary policy, a slowdown in China and a possible Brexit.
More than a third of economists predict policy makers in Indonesia will cut the benchmark interest rate on Thursday. That’s the highest proportion since March, when the central bank last lowered borrowing costs. A majority of the 29 economists surveyed by Bloomberg still forecast it will hold the reference rate at 6.75 percent.
With inflation at its lowest in more than six years and the central bank lowering its 2016 economic growth target, Governor Agus Martowardojo will have ample room to resume rate cuts. Here’s a short guide on what he’ll probably be considering.
Argument for Rate Cut
Eleven of the 29 economists surveyed by Bloomberg predict the reference rate will be cut by 25 basis points to 6.5 percent, citing low inflation and comments from officials concerned by a slowing economy.
Martowardojo said on May 25 the central bank may loosen policy if global macroeconomic conditions remain stable. That’s a change from the previous month when the governor said the bank will only focus on improving its policy framework to improve transmission.
“The central bank has signaled a cut if global and local conditions are supportive,” Juniman, chief economist at PT Bank Maybank Indonesia, said by phone. A delay in the U.S. interest-rate increase, low domestic inflation, slow credit growth and a stable rupiah mean the conditions are right, he said.
Inflation eased to 3.3 percent in May from 3.6 percent the previous month, while the central bank in May lowered its forecast for this year’s growth to a range of 5 percent to 5.4 percent from 5.2 percent to 5.6 percent previously.
“There’s a serious issue on the demand side, and BI knows this, so it will take action given the opportunity,” said Juniman, who like some Indonesians goes by one name.
Argument for Holding Rate
Bank Indonesia kept interest rates unchanged in the past two months after announcing it will adopt a new benchmark -- the seven-day reverse repo -- to better influence money-market rates. Analysts had forecast the bank would keep monetary policy unchanged until the new framework takes effect in August to provide stability to financial markets.
A rate cut now may contribute to market turmoil just as the world grapples with the U.K.’s referendum next week on whether to leave the European Union, which has heightened investor uncertainty. Sentiment is also taking a knock from speculation on when the U.S. Federal Reserve will next raise interest rates.
“If the market volatility in May were to be a reminder, uncertainties regarding the U.S. Fed rate hikes may continue to put some pressure on the rupiah going forward,” economists at DBS Group Holdings Ltd. wrote in a note. “BI may choose to remain cautious on this front.”
The Bank of Japan refrained from expanding monetary stimulus earlier on Thursday, a day after the Fed kept interest rates unchanged.
Bank Indonesia is considering a number of options to loosen lending rules to further stoke credit growth. Loans increased 8.7 percent in March from a year ago, well below the central bank’s 12 percent to 14 percent estimate for 2016.
One possibility is to allow homeowners to borrow to purchase their second property that’s yet to be built or “off the plan,” Senior Deputy Governor Mirza Adityaswara said in an interview on May 24. Another option is to adjust the loan-to-value ratio and reduce the minimum deposit required to buy property.
“We expect them to keep the reference rate steady but loosen rules on property loans,” Aldian Taloputra, an economist at Standard Chartered Plc, said from Jakarta. “About 60 percent of investments are actually in the form of buildings, so the central bank can boost economic growth in a more targeted way by supporting the property market.”
Another option to boost lending may be raising banks’ minimum loan-to-funding ratio from 78 percent and increasing the penalty for falling below that floor. The ratio is comparable to a loan-to-deposit gauge while also including funds raised from bonds.
Lastly, Bank Indonesia may consider reducing its primary reserve requirement from 6.5 percent. Australia & New Zealand Banking Group Ltd. forecasts a 50-basis point cut on Thursday while DBS Group Holdings Ltd. predicts the same for the year.
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