BI pushes more easing with third rate cut

JAKARTA. Bank Indonesia (BI) is expecting its monetary easing to become more effective at helping to stoke the economy after cutting its benchmark rate for a third consecutive month amid calls for more affordable loans.

The central bank announced on Thursday its decision to cut its key interest rate by 25 basis points (bps) to 6.75 percent, bringing total rate cuts since January to 75 bps. BI also lowered its deposit and lending facility rates to 4.75 percent and 7.25 percent, respectively, from 5 percent and 7.5 percent a month earlier.

The decision was made shortly after a policy meeting of the US Federal Reserve, which held its fund rate steady at around 0.25 percent to 0.5 percent.

BI spokesperson Tirta Segara said the central bank saw the ongoing momentum of monetary relaxation and macroeconomic stability as being due to a decline in inflation rates and receding global uncertainty.

Indonesia saw 0.09 percent deflation in February, bringing the year-to-date inflation rate to 0.42 percent and year-on-year figure to 4.42 percent, still lower than BI’s target.

Meanwhile, Tirta said total inflow from portfolio investment had reached US$2.25 billion as of February, which would help to improve current account deficit this year.

“In order to push economic growth amid increasing domestic demand, BI will be cautious in assessing future macroeconomic conditions,” he said in a press conference.

The central bank’s Thursday decision was roughly predicted by a slim majority of analysts surveyed by Reuters who expected that the benchmark interest rate would be cut for a third time amid pressure from the government to stoke economic growth. Thirteen out of 22 analysts in the poll forecast that BI would cut the key rate another 25 bps to 6.75 percent, while the other nine saw a pause in easing.

At policy meetings in January and February, BI cut the key rate by 50 bps and slashed its primary reserve requirement to give banks the ability to lend an additional Rp 52 trillion (US$3.97 billion) amid tight liquidity in the banking system.

BI economic and monetary policy director Juda Agung said the central bank had already cut its key rate by a total 75 bps since January and its primary reserve requirement by 150 bps since December, but was still seeing little effect.

According to BI’s assessment, he said, declines in banks’ time deposit rates had only reached 7 bps and lending rates about 4 bps, a far cry from the total cuts in the key rate and primary reserve requirement.

“The easing measures that we’ve taken have yet to impact banks effectively, so we want to focus on improving our monetary policy transmission in the short term,” he said.

As an effort to improve transmission, Juda said BI lowered its interbank monetary operation rates, also known as “term structure”, to follow the benchmark rate decline.

For instance, the one-week monetary operation rate was lowered from 5.7 percent to 5.5 percent, while the 12-month rate was set at the same level as the BI rate, pushing banks more to reduce their time deposit and lending rates.

In a research note on Thursday, UOB Group analyst Ho Woei Chen predicted that BI would maintain an easing bias in the second quarter, but expected that the policy would be more moderate in terms of pace with only another 25-bps cut as there remained some macroeconomic risks.

Meanwhile, Gareth Leather, senior Asia economist at Capital Economics, said further BI rate cuts would be unlikely due to certain external factors despite the Fed sounding dovish.

“We believe that US rate hikes will resume before long. If we’re right, while BI in its statement today says there is room for further easing, we think these external constraints will make further rate cuts unlikely,” Leather said. (Grace D. Amianti and Tassia Sipahutar)