Bank Indonesia likely to maintain wait-and-watch stance, loan growth to accelerate in H2 2016

According to some in the markets, Indonesia’s central bank is likely to continue cutting its rates aggressively in the near future, said DBS Bank. One of the reasons for the speculation is that average lending rates have hardly moved lower in spite of lowering the rates by a total of 75bps in 2016, according to DBS Bank.

However, BI officials’ comments recently imply that the central bank is not too worried regarding loan growth, added DBS Bank. The central bank continues to target its loan growth at about 14% by late 2016, in spite of loan growth decelerating to 8% by February 2016. BI Governor Martowardojo repeated that it is necessary to be wary of its monetary policy in the future.

There is a delay in policy transmission to be effective, noted DBS Bank. For instance, the banking system’s lending rates after the 2008-2009 crisis took over one year to totally reflect the first phase of policy loosening by the central bank. There were many reasons for this; however, the banks’ cautious approach in extending new loans was the most important one.

“We still expect loan growth to tick up in 2H16, amid acceleration in fiscal disbursement by the government”, says DBS Bank.

The Indonesian central bank is expected to keep a wait-and-watch stance at present and is unlikely to be aggressive, added DBS Bank. If the BI intends to further ease policy, it is likely to do so by lowering reserve requirement rate, noted DBS Bank.