07/15/2015
Indonesia / Rates
Bank Indonesia kept rates unchanged this week, and we expect rates to remain steady throughout the rest of the year.
No surprise from Bank Indonesia (BI) as it kept rates unchanged on Tuesday. There was not much on the Indonesian rupiah as the central bank simply re-stated its commitment to keep the unit in line with its fundamentals. Perhaps the only notable takeaway from the policy statement is BI’s indication that domestic demand remained weak in the June quarter. Going by the April and May data, we share the same sentiment. It looks almost certain that GDP growth would have stayed below 5% on-year in the June quarter.
As discussed previously, further rate cuts are unlikely to lift demand by much at this juncture. The main drag on the economy is the slow pace of fiscal spending. Typically, fiscal spending tends to accelerate only toward the year-end. This was supposed to no longer be the case for this year but data still shows a pattern similar to what has been evident in recent years. Unless the government accelerates its spending in the second half, GDP growth may be lower than 5% this year.
Pressure on BI to trim its interest rate is likely to persist. Loan growth may rise on lower interest rates. But it may not be that straightforward. If further rate cuts only mean a significantly softer rupiah, which in turn drags sentiment lower, businesses may not want new loans to expand their activities. Anchoring stability is arguably a more effective growth boosting measure for now. Expect steady rates throughout 2015.
