In­done­sia’s Cen­tral Bank should cut rates by up to 100 BPS this year

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In­done­sia’s cen­tral bank should cut its bench­mark in­ter­est rate by up to 100 ba­sis points, to 6.5 per­cent, by the end of this year, to help re­vive Southeast Asia’s largest econ­omy, the coun­try’s vice pres­i­dent has said.

The cen­tral bank, which sur­prised mar­kets last month by cut­ting its bench­mark rate, kept its in­ter­est rate un­changed at 7.5 per­cent on Tues­day, say­ing the level was con­sis­tent with ef­forts to con­tain in­fla­tion and the cur­rent ac­count deficit.

“This year, 7 per­cent would be OK, or 6.5 would be OK too, be­cause you need more in­vest­ment when the econ­omy is slow,” Vice Pres­i­dent Jusuf Kalla said in an in­ter­view. “If your in­ter­est rate is higher, then they are more likely to save.”

Kalla said In­done­sia’s in­ter­est rate, the bench­mark for de­ter­min­ing the cen­tral bank’s de­posit and lend­ing fa­cil­ity rates, was much higher than other Asian coun­tries and must be low­ered grad­u­ally to as low 5 per­cent to bet­ter com­pete with its neigh­bours.

The vice pres­i­dent said he and Pres­i­dent Joko Wi­dodo had reg­u­larly met top cen­tral bank of­fi­cials over the past month, urg­ing them to cut in­ter­est rates as in­fla­tion drops.

A cut in in­ter­est rates of that mag­ni­tude would likely pres­sure the ru­piah, which is al­ready at a near 17-year low, and spark an out­flow of for­eign funds.

The cen­tral bank has to also fac­tor in the risk posed to In­done­sia, along with some other emerg­ing mar­kets, once the Fed­eral Re­serve de­cides to raise U. S. in­ter­est rates.

Asked whether In­done­sia should

lower in­ter­est rates if it led to fur­ther weak­ness in the ru­piah, Kalla said: “Ev­ery­day we ex­plain that the ru­piah weak­en­ing is not be­cause of our econ­omy, but be­cause the Amer­i­can econ­omy is do­ing bet­ter and the U. S. dollar is strength­en­ing.”

In­done­sia needs for­eign in­vest­ment to help fund its cur­rent ac­count deficit. Kalla said the gov­ern­ment prefers long term for­eign in­vest­ment over port­fo­lio funds.

Pres­i­dent Wi­dodo, who took of­fice in Oc­to­ber, wants to spur eco­nomic growth from a five-year low of 5 per­cent to 5.7 per­cent this year.

The public lob­by­ing by In­done­sia’s top two elected of­fi­cials have raised ques­tions about the in­de­pen­dence of the cen­tral bank.

When asked about those con­cerns, Kalla replied, “In­de­pen­dent from what? Maybe in­de­pen­dent from the min­is­ter of fi­nance, but not in­de­pen­dent from the state.”

Bank In­done­sia spokesman Peter Ja­cobs de­clined to com­ment specif­i­cally on the vice pres­i­dent’s tar­get for the bench­mark in­ter­est rate, and in­stead noted the low level of an­other key rate.

“Other coun­tries’ pol­icy rate is the one di­rectly af­fect­ing the overnight money mar­ket, which in our case is the de­posit fa­cil­ity rate. It is al­ready quite low at 5.5 per­cent,” Ja­cobs said.

Bank In­done­sia Gover­nor Agus Mar­to­war­dojo has said that the gov­ern­ment has not in­ter­fered with cen­tral bank mon­e­tary pol­icy de­ci­sions.

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