Bank Indonesia signals no more rate cuts as inflation risks rise

An employee of the Indonesian banknote printing company, Peruri magnifies the new security features of the newly-launched currency of various denominations, in their office in Karawang, West Java province on January 18, 2017. (AFP Photo/Bay Ismoyo)

Indonesia’s central bank signaled the end of monetary policy easing as it focuses on inflation risks, such as rising food and oil costs.

After keeping the benchmark interest rate at 4.25 percent – as forecast by all 24 economists surveyed by Bloomberg – Assistant Governor Dody Budi Waluyo indicated there’s limited room for rate cuts after eight reductions in the past two years.

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

Economists are split on whether Bank Indonesia will cut, hold or raise interest rates this year. The bank has been on hold since October, and while it’s still concerned by lackluster credit demand and economic growth that’s stuck at about 5 percent, it’s guarding now against higher inflation – in particular rising food costs, such as rice, which rose 6.1 percent in the past two months.

To spur credit growth, which was at 7.5 percent in November, the central bank 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.

David Sumual, chief economist at PT Bank Central Asia in Jakarta, said the impact will probably be muted.

“It will not help much in boosting the credit as long as the demand for credit is still shallow,” he said. “It will only give flexibility for the banks in managing liquidity – strengthening their liquidity management – from a short-term horizon to a longer one.”

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. – Bloomberg

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