Indonesia central bank holds key rate despite slumping growth

MAY 19, 20156:00 PM

[JAKARTA] Indonesia's central bank held its key policy rate unchanged on Tuesday, as expected, shrugging off political pressure for a cut to help lift economic growth that has slumped to its slowest pace since 2009.

Instead of cutting rates - which it is loath to do as it battles inflation and wants to help the rupiah - Bank Indonesia (BI) said it will ease some restrictions to encourage banks to boost loans. "To nurture the growth momentum, BI will loosen the reserve requirement policy for loan-to-deposit ratio, loan-to-value for mortgages and downpayment for car and motorcycle loans," it said.

No details were given, but BI has hinted since last year that it will relax some rules. Governor Agus Martowardojo said amended regulations should be issued by early June. "It's hard to move, from the monetary side, but we have macroprudential (measures), we ease up on the brakes... BI still has room to manoeuvre", said Deputy Governor Perry Warjiyo.

Tuesday's policy meeting came two weeks after the government reported an annual growth rate of 4.71 per cent in the first quarter, the lowest since the global financial crisis.

Before and after the growth announcement, Vice President Jusuf Kalla called for BI to lower interest rates.

Aldian Taloputra, economist with Mandiri Sekuritas, said BI is "trying to balance managing the risks in currency while supporting growth. That's why the central bank chose to loosen its macroprudential policies instead of cutting rates." The benchmark rate has been 7.50 per cent since February, when it was cut 25 basis points.

On Tuesday, the central bank also held its overnight deposit and lending facility rates at 5.5 per cent and 8.0 per cent.

BI targets year-on-year loan growth at 15-17 per cent for this year. In March, loans grew 11.3 per cent from a year ago, down from the previous month's 12.2 per cent pace.

Annual headline inflation in April rose to 6.79 per cent from March's 6.38 per cent. Martowardojo has said annual inflation should be 4.2 per cent at year-end, still within BI's target range of 3-5 per cent.

Traditionally, the pace of price-rises increases during the Islamic fasting month of Ramadan, which this year begins in mid-June.

The rupiah rose as much as 0.2 to 13,100 per dollar, compared to Monday's close of 13,132. Before the central bank decision, the rupiah stood at 13,180. The rupiah has lost 5.6 per cent against the dollar this year, making it the worst-performing Asian currency.

REUTERS