Bank Indonesia Holds Key Rate While Easing Reserve Limits

Updated on
  • All 24 economists surveyed by Bloomberg predicted decision
  • Assistant governor says window to cut rates is closing

Indonesia’s central bank left its benchmark interest rate unchanged, while partly easing reserve limits for lenders, as it tries to spur the economy without fanning inflation risks.

Governor Agus Martowardojo and his board held the seven-day reverse repurchase rate at 4.25 percent on Thursday, as forecast by all 24 economists surveyed by Bloomberg.

After an aggressive bout of easing that delivered eight cuts over the past two years, Indonesia’s central bank has been on hold since October, guarding against inflation and currency risks. While economic growth is still stuck at about 5 percent, rising food prices -- in particular for rice, which rose 6.1 percent in the past two months -- is starting to worry officials.

“The monetary stance remains neutral,” Assistant Governor Dody Budi Waluyo said. “We will bring inflation to meet the target of 3.5 percent. Future risks remain, but we see the window for cutting rate is closing.”

Cost Pressures

Rice prices have risen 6.1 percent in the past two months

Source: Bank Indonesia

* Prices in rupiah per kilogram

To spur credit growth -- which remains lackluster at 7.5 percent in November -- Bank Indonesia lowered the amount of deposits that lenders must hold on reserve on a daily basis to 4.5 percent from 5 percent. Banks will still be required to maintain an average reserve ratio of at least 6.5 percent over a two-week period. 

Economists, including Aldian Taloputra at Standard Chartered Plc in Jakarta, said the move would help improve bank liquidity.

“This is not monetary policy loosening, since the total reserve requirement ratio is unchanged,” he said. “This policy is aimed at improving bank liquidity management and at the end strengthening monetary policy.”

Stronger Growth

The central bank expects loan growth to pick up this year to 10-12 percent, while the economy will improve, supported by a pick up in household consumption and stronger exports, Waluyo said.
Other key points from the monetary policy statement:

  • Growth estimate for 2018 maintained at 5.1 percent to 5.5 percent
  • Daily minimum primary reserve ratio for Islamic lenders set at 3 percent with two-week average of at least 5 percent
  • Inflation seen as risk but forecast to remain within target band of 2.5 percent to 4.5 percent through 2018

Economists surveyed by Bloomberg predict inflation will average 3.8 percent this year and next, the same pace as in 2017. Consumer prices rose 3.6 percent in December from a year ago.

Gareth Leather, a senior Asia economist at Capital Economics Ltd. in London, said there’s still room for the central bank to ease monetary policy, possibly around the middle of the year to spur growth.

“A weak fiscal position, slow progress on reform and a subdued outlook for commodity prices suggest a sustained recovery remains unlikely,” he said. While inflation picked up slightly in December, it’s still comfortably within the target band and won’t prevent the bank from easing, he said.

Policy makers are also concerned about potential volatility in the rupiah that may come from rising interest rates in the U.S. and elsewhere. The Federal Reserve has penciled in three rate hikes in 2018 following three last year, and Bank Indonesia has already signaled it remains ready to act to keep the currency stable. The rupiah has strengthened 1.6 percent against the dollar this year after being one of Asia’s worst performers in 2017.

— With assistance by Yudith Ho, Rieka Rahadiana, Harry Suhartono, and Manish Modi

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