Bank Indonesia surprises with lift in interest rate to 5.25%

JAKARTA – In another decisive move, Bank Indonesia has raised its policy rate by 50bps to 5.25%, above market expectations of a 25bps hike. With a cumulative 100bps increase in interest rate since May 17, the central bank has made clear its commitment to guard against IDR weakness.

ANZ Bank comments that BI’s tight monetary policy will remain supported by its double intervention policy and the provision of adequate liquidity. “Whether today’s surprise move is enough to stem the decline in IDR is still dependent upon the broader global environment,” it says. “At this point, BI moves will be highly responsive to market volatility.”

To offset the negative impact of the recent aggressive tightening, the central bank also announced the relaxation of Loan-to-Value (LTV) ratios. Effective August l, looser LTV ratios on the property sector, and adjustments to the rate of credit disbursements, will be implemented.

The policy is aimed at supporting the property sector and boosting credit growth, ANZ says.

Despite the rise in interest rate, BI has maintained its credit growth target for the year at 10-12%. As of April 2018, credit has risen by 8.9% y/y.

The central bank also expects the current account deficit will not exceed 3.0% of GDP this year.

“The marked deterioration in the trade deficit in the last few months implies that fresh external funding needs have risen. We will be watching closely the evolution of the trade balance, specifically the erosion of the surplus in non-oil & gas trade.

“Previously, non-oil & gas trade provided a sufficient cushion to the structural deficit in oil & gas trade.”   www.live.anz.com (ATI).