Bank Indonesia Remains Committed to Tight Monetary Stance
The central bank of Indonesia (Bank Indonesia) is expected to keep its benchmark interest rate (BI rate) relatively high in order to safeguard Indonesia's financial stability in 2016 (instead of seeking accelerated economic growth through a rate cut). Despite easing pressures on inflation and the country's current account balance, Bank Indonesia Governor Agus Martowardojo said that persistent global uncertainty (referring to the looming US Fed Fund Rate hike and China's slowdown) justifies the tight monetary stance.
As such, Bank Indonesia targets credit growth in Indonesia at a mere 12-14 percent year-on-year (y/y) in 2016, slightly higher from credit growth in 2014 and (estimated growth in) 2015, but far below credit growth realization in the preceding years (see table below). This is the result of the economic slowdown and the central bank's higher borrowing costs. Meanwhile, third-party funds are projected to grow 13-15 percent (y/y) next year. Regarding economic growth, Bank Indonesia expects to see growth in the range of 5.2 - 5.6 percent (y/y) in 2016, accelerating to the range of 6.0 - 6.5 percent (y/y) in the years 2017-2019 on improving domestic demand and global conditions.
¹ per September 2015
² projection Bank Indonesia
Martowardojo stated at the annual Bank Indonesia gala dinner on Tuesday evening (24/11) in the Jakarta Convention Center that macroeconomic stability is a prerequisite for tenacity and increased competitiveness of domestic businesses. The central bank's monetary policy is kept or adjusted to a level that allows economic growth to occur in line with the economy's capacity in order to avert high pressures on the country's inflation rate and current account balance.
The gala dinner was joined by Vice President Jusuf Kalla (who has repeatedly requested the central bank to cut its interest rate environment in order to make way for accelerated economic growth although - by law - Indonesia's central bank is independent from government interference) as well as several ministers and business players.
Although not having cut the key BI rate (since February 2015), the central bank did ease its monetary stance by lowering the loan-to-value ratio for property and car/motorcycle purchases (using credit from a financial institution) in mid-2015. Moreover, earlier this month, Bank Indonesia cut the primary minimum statutory reserves (Giro Wajib Minimum Primer) from 8.00 percent to 7.50 percent (effective per 1 December 2015), hence providing more room for local banks to lend.
Regarding the longer term, Bank Indonesia expects inflation in the range of 2.5 - 4.5 percent (y/y) and a current account deficit around 2.5 percent of the country's gross domestic product (GDP) up to 2019.
Indonesia's Financial Services Authority (OJK) also expects the country's credit growth to reach about 12-13 percent (y/y) in 2016, slightly higher from this year's growth. Credit expansion next year remains relatively limited as global economic growth remains sluggish at about 3.5 percent (y/y) amid weak commodity prices and monetary tightening in the USA.
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