BI compromises with PRR reduction

Benchmark rate kept at 7.5% as expected

JAKARTA: Indonesia’s central bank yesterday cut the primary reserve requirement for lenders while keeping its main interest rate unchanged, compromising in providing some support to the economy while guarding against currency weakening.

Bank Indonesia lowered the reserve requirement to 7.5% from 8%, effective Dec 1. The bank held the reference rate at 7.5% as predicted by 13 out of 14 economists surveyed by Bloomberg News, and signaled it may cut interest rates if market reaction to the expected increase in US borrowing costs is muted.

The decision underscores the dilemma for policymakers in Indonesia as they balance pressures from some government officials to stimulate a faltering economy, while girding against the risks of capital outflows and market volatility.

A looming threat for emerging markets is that futures show a 66% chance the US Federal Open Market Committee will announce a rate increase after its December meeting, up from a 50% probability at the end of October.

“The reserve requirement cut can be seen as akin to a halfway house on the journey towards further easing,” said Wellian Wiranto, an economist at Oversea-Chinese Banking Corp in Singapore.

“It would help release more liquidity into the banking system but the impact on growth may be more symbolic given that some banks might still be reluctant to lend until clearer signs of an economic turnaround emerge.”

“The reserve ratio cut will add around 18 trillion rupiah ($1.3 billion) in lending capacity, and the central bank hopes this can boost growth,’’ said deputy governor Perry Warjiyo.

“The central bank is being prudent,” governor Agus Martowardojo told reporters in a policy briefing that was broadcast live on YouTube for the first time. “We are very watchful toward the Fed rate and see a US increase in 2015 as a strong possibility.’’

The rupiah fell 0.2% to 13,748 a dollar yesterday, according to prices from local banks. It is down nearly 10% this year, the second-worst performer behind the ringgit among major Asian currencies.

“They are still worried about the possibility of a Fed rate hike and the impact of that on the rupiah,” David Sumual, chief economist at PT Bank Central Asia in Jakarta, said before the decision. “Many people say the rupiah weakness has been priced in, but we still don’t know.”

“Bank Indonesia wants to see the market reaction to the FOMC’s December meeting,’’ senior deputy governor Mirza Adityaswara said in an interview yesterday.

Responding to a question on whether the central bank will cut its main interest rate if the market reaction is muted, he said “probably.”

In an interview published in the Jakarta Post earlier this month, Martowardojo signaled a cautious approach, saying “if we are careless in setting the interest rate, for example by lowering it, the exchange rate of the rupiah will immediately plummet.”

Inflation eased to 6.25% in October, the slowest rate this year, while remaining above the central bank’s target range for 2015 of between 3% and 5%. Martowardojo said inflation would end the year at the lower end of the range.

The government expects 2015 gross domestic product growth to be 4.8% at most, which would be the slowest pace since 2009.

BI said yesterday it expected full-year economic growth this year to be around 4.7-4.8%.