Bank Indonesia (BI) reaffirmed its hawkish stance with its decision on Tuesday to keep its key interest rate unchanged, but unexpectedly introduced "more accommodative" policy measures to support the country’s banking industry and boost credit growth.
The benchmark BI rate, the main benchmark for lending and deposit rates in the economy, was kept at 7.5 percent, the central bank said in a statement after its monthly board meeting on Tuesday.
As Indonesia’s inflation and currency pressures have recently eased, BI turned its focus to the country’s banking sector as it sought to boost liquidity among local lenders.
The central bank said that year-on-year credit growth in 2015 could hit between 15 to 17 percent this year, in line with its recent survey, which showed bankers were upbeat that they could book at least 17.1 percent of lending growth this year.
Such a target was seen as too optimistic given the tight liquidity in the economy: as of February, credit growth stood at just 12.2 percent, increasing only marginally compared to 11.5 percent a month earlier.
"To achieve [the credit growth target, Bank Indonesia will immediately communicate a more accommodative macroprudential policy," the central bank said in a statement.
The monetary policy relaxation for local bankers would be done through the expansion of the definition of deposits, which would soon include securities such as bonds, so that banks could have healthier levels of loan-to-deposit ratio (LDR).
BI’s safe LDR level is 92 percent, with higher figures indicating that a bank is facing tighter liquidity and might run into difficulties if it wants to expand its credit further.
BI also said it would relax the LDR’s upper requirement for banks that managed to meet their small and medium enterprise (SME) credit requirement early. BI requires all banks to disburse at least 20 percent of their lending portfolio to SMEs by 2018.
"In the absence of an outright easing measure for rate cuts, BI appears to be resorting to quasi ones of tinkering with the banking system’s lending flows," noted Wellian Wiranto, an economist with OCBC Bank in Singapore.
The central bank surprised the markets when it performed an about-face in February, cutting the BI rate by 25 basis points to 7.5 percent, following months of consistently championing the need for high interest rates to maintain economic stability.
The interest-rate cut did not bode well for the market, consequently exerting pressure on the rupiah whose 4 percent depreciation against the US dollar in the first quarter was among the worst in Asia.
The currency, nevertheless, has strengthened for four consecutive weeks, trading at 12,979 per dollar on Tuesday, according to the Jakarta Interbank Spot Dollar Rate (JISDOR).
The central bank might have room to further cut its interest rate by 25 basis points to 7.25 percent this year, but it should remain vigilant over renewed pressure on inflation, predicted Dian Ayu Yustina, an economist with Bank Danamon.
"Expect higher inflation in the next few months as the weak rupiah has started to have material impact on inflation," she said, predicting inflation would fall to 3.9 percent by year-end, compared to 6.4 percent in March.
"We may see a higher exchange rate pass through as a reduced subsidy has caused the prices of energy now to be dependent on the market factors, such as global oil price and the exchange rate," warned Dian.