Bank Indonesia raised its benchmark interest rate on Tuesday for the first time in 13 months and lessened liquidity requirements for banks, in an attempt to tame expected inflation following the fuel price hike.
The central bank raised its benchmark rate by 25 basis points to 7.75 percent. The government increased the price of subsidized fuel by an average of 33.6 percent on Tuesday.
“The increase of the BI Rate is to anchor inflation expectations and ensure that inflationary pressures remain under control and temporary, after the subsidized fuel price hike,” Bank Indonesia Governor Agus Martowardojo said in a press briefing.
Bank Indonesia now expects to see year-end inflation between 7.7 percent and 8.1 percent, higher than government’s target of 7.3 percent.
The consumer price index rose to 4.8 percent last month, gaining pace from a 4.5 percent increase a month earlier.
Still, Bank Indonesia expects inflation will return to between 3 percent and 5 percent in 2015.
The central bank also increased its lending facility rate by 50 basis points to 8 percent and will keep the overnight deposit rate at 5.75 percent.
“We widened the corridor to maintain liquidity, and also for banks to channel that liquidity, in order to boost market deepening,” Bank Indonesia deputy governor Perry Warjiyo said.
“This way, lending can grow between 15 percent and 17 percent next year, compared to 13 percent this year,” Perry said.
Analysts said that the increase in the subsidized fuel prices would increase the risk that some business may default on their debt to lenders, such as those in retail and automotive sectors, which suffer from lower demand as people’s purchasing power is eroded by inflation.
“Banks will see an uptick in non-performing loans and thus higher provision costs. This will slow earnings growth further, but solvency risk will remains muted,” said Wilianto, head of research at Maybank Kim Eng Indonesia, in an e-mail to the Jakarta Globe on Tuesday.
Anticipating pressure on lenders, Bank Indonesia will implement so-called macroprudential policy adjustments, which aim to ensure banks’ liquidity and loan disbursement toward productive sectors.
The first measure is to loosen requirements for calculating their loan to deposit ratios, or LDR.
Lenders now can include securities issued by themselves as deposits in calculating their loan to deposit ratios.
In effect, that would increase banks’ capability to lend more money to their customers, despite the rate hike, and ensure banks can disburse enough capital to drive the country’s economy, deputy governor Halim Alamsyah said.
Bank Indonesia also said that it would provide more incentives to banks that increase lending toward micro-, small- and medium-sized enterprises, and that it would maintain rupiah exchange rates in accordance with their fundamental value.
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