Indonesia's central bank on Thursday held its key policy rate unchanged for a second month, keeping its focus on maintaining financial stability despite sluggish growth in the third quarter. Southeast Asia's biggest economy is expected to grow 5.1 percent in 2017, near the lower end of its 5.0-5.4 percent target for the year, Bank Indonesia (BI) Governor Agus Martowardojo told a news conference.
The central bank said it was keeping its countercyclical capital buffer at zero, indicating that it still expects economic growth to remain sluggish and wants to encourage banks to boost lending. The capital buffer is usually dependent on economic conditions and can be adjusted up to prevent loan growth from heating up. The bank on Thursday held the seven-day reverse repurchase rate at 4.25 percent for a second straight month.
"The current interest rate level is seen as sufficient to keep the inflation rate within the target range and the current account deficit at a healthy level," Martowardojo said. All 20 analysts polled by Reuters forecast that the policy rate would be held. Martowardojo said risks of monetary tightening in developed economies was a looming risk for Indonesia, with household consumption and bank lending yet to strengthen.
In August and September, the BI cut rates by a total of 50 basis points, in a bid to boost growth. It has lowered the key rate by 2 percentage points since the beginning of 2016. The cuts have been possible because inflation, often a problem in Indonesia, has been muted. The central bank said it expected the impact of previous easings to continue to trickle down into the financial system, but noted that lending growth was still below expectations.
It forecasts 2017 loan growth at 8 percent, at the bottom of an earlier estimate of 8-10 percent and below the financial regulator's (OJK) target of 10 percent. Martowardojo said banking liquidity was expected to remain ample up to the end of the year, indicating that barriers to loan growth were on the demand side.
The bank has halted cutting rates amid concern a narrowing yield spread could trigger pressure on the rupiah ahead of a widely anticipated rate increase by the US Federal Reserve in December.
Foreign investors hold about 38 percent of Indonesia's local currency government bonds and there have been some outflows in recent months from both bond and stock markets. After hitting a 2017 peak of 13,135 rupiah per dollar on September 11, the currency has weakened by about 3 percent against the US currency since then. The BI's next policy meeting ends on December 14, just hours after the Fed announces a decision at its final meeting of 2017. So far, BI's rate cuts have failed to feed through to growth or lending.
In the third quarter, Indonesia's economy grew by 5.06 percent from a year earlier. That was slightly better than the 5.01 percent reported for each of the first two quarters, but below market expectations for 5.13 percent growth. Consumption, which makes up about half of the economy, grew at a slower pace compared with the previous quarter, despite the easing. The government believes growth will pick next year, while the International Monetary Fund has a forecast of 5.3 percent, compared with its projection this year of 5.1 percent.
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