Central Bank Holds Benchmark Rates Steady at 4.25%

Indonesia's central bank intervened again in the currency market to support the rupiah, as analysts predicted a close call on whether interest rates will be raised at a policy meeting later on Wednesday (15/08). (Reuters Photo/Darren Whiteside)

By : Adinda Normala | on 9:39 PM February 15, 2018
Category : Business, Economy

Jakarta. Bank Indonesia, the country’s central bank, held its rates unchanged on Thursday (15/02) to maintain stability amid uncertainty in the global economy.

BI kept its seven day reserve repurchase rate — the rate at which the central bank of a country borrows money from commercial banks — at 4.25 percent for a fifth straight month.

The deposit facility stayed at 3.50 percent, while the overnight lending facility also remained unchanged at 5 percent.

"The policy is consistent with efforts to maintain macroeconomic stability, as well as to contribute to the domestic economic recovery,” Bank Indonesia Governor Agus Martowardojo said after the central bank's board of governors meeting on Thursday.

Bank Indonesia also determined that previous monetary policy easing was sufficient in boosting the momentum of the domestic economic recovery.

The central bank will watch a number of external risks, such as increasing uncertainty in global financial markets, due to the expected rise of fund rates by the US Federal Reserve at least three times this year, as well as rising global oil prices.

Some fear the fed fund rate rise may push investors to pull their capital from Indonesia, and Bank Indonesia may have to adopt tighter monetary policies to maintain a sufficiently high interest rate difference with the United States, which in turn would persuade investors to keep their money in the country.

The value of the rupiah against the US dollar has weakened since last week, hovering above Rp 13,500 ($0.94), according to data from Bank Indonesia. The rupiah exchange rate in the 2018 state budget is set at Rp 13,400 per US dollar.

Domestically, the central bank said it wanted to see local banks increase lending.

Last year, the lending rate only grew 8.2 percent from the previous year, despite ample liquidity in the banking system as deposits grew 9.4 percent. Bank Indonesia targets loans to grow between 10 percent and 12 percent this year, while third-party funds are expected to rise by 9 percent to 11 percent.

Perry Warjiyo, Bank Indonesia deputy governor, said domestic banks still have room to lower their interest rates by 150 basis points on average this year. Today, interest rates of consumer loans remains at 12.54 percent, investment loans at 10.51 percent and working capital loans at 10.75 percent.

Bank Indonesia last cut its benchmark interest rate in October to 4.25 percent from 4.5 percent, as inflation continued to decline at the time. This also complemented the bank's monetary easing, which was cut by 200 basis points from December 2015 until last year.

The consumer price index increased 3.25 points in January compared with the same period in the previous year, which was the slowest since December 2016.

Bank Indonesia targets the inflation rate to be between 2.5 percent and 4.5 percent this year.


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