Bank Indonesia May Not Cut Interest Rates Further for a Long Time
Bank Indonesia, the central bank of Indonesia, decided to maintain its benchmark interest rate, the BI 7-day (Reverse) Repo Rate (BI-7 day RR Rate), at 4.75 percent at the February 2017 policy meeting as Indonesia's inflation rate is expected to rise amid growing domestic demand and administered price adjustments, while the central bank also tries to mitigate the impact of looming normalization of US interest rates (expected later this year). Meanwhile, Bank Indonesia kept its deposit facility and lending facility rates at 4.00 percent and 5.50 percent, respectively.
The central bank's current interest rate level is considered accommodative enough to trigger accelerating credit growth in 2017, and yet sufficient to maintain macroeconomic and financial system stability. Although Bank Indonesia cut its interest rates six times in 2016 the impact of such easing on credit growth was limited in 2016. We expect to see a bigger impact of the accommodative monetary policy on Indonesia's credit growth in 2017. In full-year 2017, credit growth was recorded at 7.9 percent (y/y), down from a pace of 10.5 percent (y/y) one year earlier. This bleak performance was due to low demand for loans along with corporate consolidation and sluggish global economic growth.
Considering Bank Indonesia Governor Agus Martowardojo said room for further easing is "not too wide", due to global risks and domestic inflationary pressures, we would not be surprised if Bank Indonesia keeps its interest at this level for a long while. If Indonesia's monetary policy is changed later this year, then it - most likely - will involve monetary tightening, rather than easing.
In a statement on its website Bank Indonesia said the global economy improved on the back of gains in the economies of the USA and China, as well as rising international commodity prices. US economic momentum is expected to persist, driven by increased consumption and investment. Robust growth in China is also predicted in line with the country's gradual economic rebalancing process.
Meanwhile, world commodity prices, including oil and Indonesia’s export commodities, have shown an improvement. Nevertheless, several global risks demand heightened vigilance. The US fiscal expansion plans amid signals of monetary tightening can cause a sharply strengthening US dollar as well as an earlier-than-expected policy rate adjustment. Relaxations in the US financial sector, while boosting domestic financial activities in the US, may elevate risks in the global financial system stability. Moreover, the US protectionist trade policy, the approval of "Hard Brexit" by the British parliament and several geopolitical risks in Europe, can reduce the world trade volume and increase global uncertainty.
In Indonesia economic growth accelerated in 2016 on strong household consumption, and improvements in export and investment (although the level of acceleration was lower-than-estimated). The national economy grew 5.02 percent (y/y), up from 4.88 percent (y/y) in the preceding year. Households were inclined to consume as controlled inflation helped maintain public purchasing power. Exports improved on the back of the increasing world trade volume and supported by several rising commodity prices such as coal and palm oil. Stronger investment was down to non-building investment in the form of automotive and other equipment, while building investment slowed down along with the lower fiscal stimulus. Bank Indonesia projects economic growth in 2017 at the range of 5.0-5.4 percent (y/y), on the back of strong private consumption, rising government consumption, and improvements in both private and government investments. Meanwhile, export growth is expected to increase, coupled with increasing imports due to robust domestic demand.
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