Bank of Indonesia Says Limited Room to Cut Interest Rates
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Bank Indonesia Governor Agus Martowardojo emphasized on Wednesday (24/01) that there is limited room for lowering interest rates due to the United States Federal Reserve’s plan to increase its benchmark rate, and the need to keep inflation in check.
“[Room] to adjust the seven-day reverse repo rate is probably very narrow under the current conditions,” Agus told reporters. He added that the central bank will rely more on other monetary instruments to drive the economy.
Agus said Bank Indonesia will relax reserve requirements by July. Lenders are currently required to keep a minimum reserve of 6.5 percent of their total rupiah deposits at the central bank at any time, comprising daily reserve of 5 percent and a two-week averaging reserve of 1.5 percent.
Agus said Bank Indonesia will increase the averaging portion to 2 percent to allow lenders to be more flexible in managing their liquidity.
It will also relax the averaging rules for foreign exchange deposits and sharia-compliant banks.
The central bank will also allow larger bond purchases as a portion of banks’ loan to deposit ratios, and improve secondary reserve requirements for macroprudential liquidity buffers.
Agus said the external risk stems especially from the Fed’s plan to increase its benchmark rate, while there are also fears that geopolitical conditions may increase pressure on financial market stability, including in Indonesia.
Bank Indonesia will also pay more attention to inflationary pressures, especially on volatile goods. Prices of rice, chili peppers and other horticultural items are expected to greatly contribute to inflation this month, he said.
“We welcome the government’s decision to import rice, and as rice harvest will also take place soon, the prices will be under control,” Agus said.
Bank Indonesia has set an inflation target of between 2.5 percent and 4.5 percent this year.
The central bank 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 saw it cut by 200 basis points from December 2015 until last year.
Questions & Answers
Q.Why is Bank Indonesia hesitant to cut interest rates?
Why is Bank Indonesia hesitant to cut interest rates?
Bank Indonesia sees limited room to cut interest rates due to the United States Federal Reserve’s plan to increase its benchmark rate and the ongoing need to keep inflation under control within the country.
Q.What alternative monetary tools will Bank Indonesia use to stimulate the economy?
What alternative monetary tools will Bank Indonesia use to stimulate the economy?
The central bank plans to relax reserve requirements for lenders by July, increase the averaging portion for rupiah deposits, and ease averaging rules for foreign exchange deposits and sharia-compliant banks.
Q.What specific goods are expected to contribute to inflation this month?
What specific goods are expected to contribute to inflation this month?
Prices of rice, chili peppers, and other horticultural items are expected to greatly contribute to inflation this month. The central bank welcomes government action to import rice to help manage these prices.
Q.When did Bank Indonesia last adjust its benchmark interest rate?
When did Bank Indonesia last adjust its benchmark interest rate?
Bank Indonesia last cut its benchmark interest rate in October, reducing it to 4.25 percent from 4.5 percent. This followed a period of declining inflation and was part of broader monetary easing measures.
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