Bank Indonesia still sees room for further rate cut
The Jakarta Post, Jakarta
Bank Indonesia deputy governor Aslim Tadjudin said on Friday that the central bank expected its benchmark rate to further drop on the weak inflation outlook this year.
"We still see room for further rate cuts," he was quoted by Dow Jones as saying.
The central bank has been aggressively cutting the interest rate of its one-month SBI promissory notes in the hope that the banking industry follows suit and also cuts their lending rates to make loans more affordable for the corporate sector. Strong investment activities by the corporate sector would thus push economic growth higher.
Lower SBI rates would also ease the burden of the government in servicing its huge domestic debts.
The SBI rate is currently 8.7 percent, compared to around 13 percent earlier this year.
The central bank expected inflation this year to be at around 5-6 percent, much lower than the initial projection of 9 percent. The lower inflation environment is the result of a rapid appreciation in the exchange rate of the rupiah against the U.S. dollar, which makes the prices of imported goods and raw materials cheaper.
Benign inflation has provide room for the central bank to continue cutting its benchmark rate during the past eight months. Declining interest rates in other countries is also a contributing factor.
But, unfortunately, the interest rate on bank lending has remained stubbornly high, at between 17-18 percent. Many businessmen have said that the ideal lending rate should be 12-13 percent.
On many occasions, Bank Indonesia Governor Burhanuddin Abdullah has urged banks to cut their lending rates, saying that he wants to see lending grow by 20-22 percent next year, to support an economic growth target of 4-4.5 percent.
He explained that the current macro economic stability should boost investment activities.
According to central bank data, bank lending during the first semester of this year only grew by around 7 percent, amounting to around Rp 23.8 trillion in fresh loans, increasing the total outstanding bank loans to Rp 434.1 trillion.
Assuming that lending growth in the second half will be about the same as in the first half, outstanding loans by the end of this year will reach Rp 458 trillion.
This means that a lending growth of 20 percent would require fresh loans of about Rp 91 trillion.
Some bankers, however, said that it would be difficult to meet the central bank's demand.
They said the country's banks -- which have just started to recover from the devastating impact of the late 1990s financial crisis -- had to be extra careful with their money, particularly as the corporate sector was still associated with high risk and was mired in a slow restructuring process.