JAKARTA (TheInsiderStories) – Bank Indonesia, the country’s central bank, maintained its key interest rate steady on Thursday (18/01) and pledged to speed up plans to ease reserve limits for lenders to give them more liquidity.
The central bank’s board of governors decided to hold the bank’s seven-day reverse repurchase rate at 4.25 percent. This means the rate has stayed the same in four straight months, as BI intended to guard against currency risks and possible accelerated inflation.
Bank Indonesia also kept the floor and ceiling rate for both the deposit and lending facility rate at 3.50 percent and 5.00 percent respectively.
Dody Budi Walujo, the head of macroeconomic policy at BI, said the central bank noted there are some factors both external and internal that may affect Indonesia’s economy negatively. This include normalization of monetary policy in some developed nations, some geo-political risks in the world that can further spike the oil price.
At home, the central bank is still being cautious of the intermediary role of commercial banks, which is seen not strong enough to stimulate the economy, while there is also a prospect of rising inflation due to possible rice price increase.
This led the central bank to implement a monetary policy mix via the rate instrument or regulation to help tame inflation and help liquidity of the country’s commercial lenders, he said.
In a bid to help commercial lenders channel more fund to the economy, BI lowered the amount of deposits that banks must hold for its reserve on a daily basis to 4.5 percent from 5 percent. However, banks still need to maintain an average reserve ratio of at minimum 6.5 percent over a two-week period.
Easing rules of reserve limits will help banks to have a bigger liquidity so they can use it for loans.
Dody highlighted future risks remain that may affect the central bank’s monetary stance, and he said the lender is now seeing “room to lower the key rate is closing.”
BI trimmed its key rate by 150 basis points in total in 2016, and further lowered it by a total of 50 basis points last year, despite the country was facing risks of possible capital outflows that could weaken the rupiah. Lower key rate may reduce attractiveness of portfolio investment in the country.
BI estimated Indonesia’s economy to grow at 5.1 percent to 5.5 percent this year.