Bank Indonesia leaves policy rate unchanged, to maintain neutral policy stance in near-term

Bank Indonesia (BI) left its 7-day reverse repo rate unchanged at the monetary policy meeting held Thursday, largely in line with market expectations. Also, the central bank is expected to maintain its neutral stance in the near term, following stabilization in economic growth and challenging credit transmission that has reduced the need for monetary easing.

The BI maintained the 7-day reverse repo rate at 4.75 percent. The 150 basis points of rate cuts so far this year will be supportive of consumption as well as investment and is thus adequate for now, given that loan growth is on track to meet BI’s downward revised loan growth target.

Private consumption has been the sole driver of Indonesia’s economy, with investment tepid especially as public capital expenditure has been constrained. The central bank sees GDP growth at around 5 percent in 2016 and improving to 5-5.4 percent in 2017.

Credit transmission remains challenging. Real rates remain elevated despite the rate cuts this year. Banks are wary of extending loans and lowering rates amid increased non-performing loans which climbed to 3.1 percent in Q3 compared to an average of 2.6 percent for the whole of 2015.

"Looking ahead, we expect BI to maintain rates for an extended period of time barring significant deterioration in the economy," ANZ commented in its latest research report.