Indonesia central bank seen taking a pause after multiple rate cuts

An employee of Bank Indonesia stands next to a giant one thousand rupiah coin on display inside the bank's headquarters in Jakarta, Indonesia in this March 16, 2016. REUTERS/Garry Lotulung

JAKARTA: Indonesia's central bank, which has cut rates aggressively this year, is expected to hold its benchmark steady on Thursday as it assesses the impact of earlier policy easing on the sluggish economy.

Bank Indonesia (BI) has cut its key rate five times in 2016, by a total of 125 basis points, and trimmed banks' reserve requirement ratio to aid economic growth, which last year was 4.8%, the slowest since 2009.

The central bank has switched its main policy rate from the 12-month reference rate to the 7-day reverse repurchase rate, to more directly impact the financial market and enhance the effects of its monetary easing.

Thirteen of 17 economists surveyed by Reuters said BI will leave its benchmark on Thursday. The other four forecast another 25 basis point cut.

"We think that BI will wait to see how effective these measures are in boosting growth before cutting again," Capital Economics said in note.

The consultancy noted that BI might ease monetary policy again later, but the timing "will depend on when and how aggressively the US Fed moves to tighten interest rates".

STILL ROOM TO CUT? 

ANZ, in the minority seeing a cut on Thursday, argued that subdued inflation and stability in the current account deficit and the rupiah's exchange rate - which have provided room for BI's five rate cuts - support the case of another on Thursday.

September's annual inflation rate was near the lower end of BI's target band, at 3.07%. The rupiah has been stable, trading near 13,000 per dollar since July. The third quarter's current account deficit is expected to stay at a comfortable level.

So far, BI's 2016 rate cuts have had limited impact on commercial banks' sluggish lending. In August, bank loans grew just 6.83% from a year earlier, the weakest since November 2009 and very low compared with historical trends.

Adding to problems for banks' balance sheets are rising non-performing loans (NPL), which in August crept up to 3.22% of all outstanding loans, from 3.18% in July.

Many bankers blame weak domestic demand for the slow expansion in lending. They say recovery in economic growth would help them halt increases in the level of NPLs.

The central bank has signalled it will continue to adjust policy to try and spur demand. After BI's last rate cut on Sept 22, governor Agus Martowardojo said its easing mode would continue until early 2017. - Reuters