Indonesia's central bank fended off political pressure to cut its benchmark interest rate to aid weak growth on Tuesday but said it sees some room to ease monetary policy and lowered a reserve requirement. Bank Indonesia (BI) announced the holding of all main interest rates, which have been unchanged since February, hours after Vice-President Jusuf Kalla said it should lower the policy rate from 7.50 percent to boost slack investment.
"With high uncertainty in global financial markets, especially with a possible US rate rise and varying monetary policy by the EU, Japan, and China's central banks, BI will remain cautious in taking steps to ease monetary policy," Governor Agus Martowardojo said after the policy meeting. BI said the cut in rupiah reserve requirements to 7.5 percent from 8 percent should make 18 trillion rupiah ($1.31 billion) available to banks to loan.
"When that liquidity enters the market, banks do not need to look for additional liquidity when giving out loans," said Senior Deputy Governor Mirza Adityaswara. "If there is no loan yet, the 18 trillion rupiah will replace costly funding for banks. Thus, this would lower funding costs. This would have an impact to interest rates indirectly." Wellian Wiranto, economist at OCBC bank in Singapore, said the reserve requirement cut "can be seen as the first salvo of easing measures that they are going to do. Cutting the policy rate now might be deemed too risky this close to potential Fed lift-off. So they start to prepare the grounds."
The additional rupiah liquidity would help ease the tightness in money markets, some of it as a result of BI's intervention in spot and forward rupiah trading. Interbank rates have inched up gradually, reflecting that reduced rupiah liquidity since August. After its monthly meeting in October, BI said domestic economic pressures were easing. On Tuesday, the central bank reiterated that inflation,
which earlier this year was above 7 percent, is falling significantly and the current account deficit, once a major worry, has shrunk sharply. But BI has been unable to cut the benchmark rate because doing so would hurt the rupiah, which has weakened nearly 10 percent this year against the dollar. Due to concern about the rupiah, 12 of 13 analysts in a Reuters poll predicted BI would hold the rate on Tuesday. The benchmark rate couldn't be lowered on Tuesday "because we are prudent and cautious" and face global factors such as Fed policy, Adityaswara said.
The Fed's mid-December policy meeting, at which many analysts believe it will finally raise US interest rates, will be completed just hours before BI's last 2015 meeting on December 17. The reserve cut and the governor's comments about room to loosen policy "greatly increases the chances of a rate cut sometime over the next few months", said Gareth Leather, Asia economist of Capital Economics. Indonesia this year has been growing at its slowest pace since 2009, which has spawned the political pressure on BI to lower interest rates. On Tuesday, BI said it expects full-year economic growth this year to be around 4.7-4.8 percent.
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