Bank Indonesia’s rate cut unlikely to stimulate loan growth, says DBS Bank

Indonesian central bank, Bank Indonesia suggested that the consumer price inflation might reach below 3.5 percent in 2018, signalling that there still is room for additional rate cuts, stated DBS Bank in a research report. The conditions that permitted the central bank to lower rates in August require to be sustained though. This suggests the current account deficit staying manageable, rupiah stable against the U.S. dollar, and contained risk of excessive and considerable capital outflows.

Indeed, the rate cut in August was meant to underpin loan and GDP growth. Loan growth continues to be stubbornly low this year, despite Bank Indonesia having cut its key policy rate by an impressive 150 basis points last year. The transmission of monetary policy is close to being completed by now.

The lower interest rates might not matter that much at this juncture, noted DBS Bank. They might give a marginal lift in new investment loans demand. However, not until there are significant results from the government’s infrastructure overhaul will there be more rewards from higher private investment growth. On the supply side, major banks are unlikely to turn aggressive in extending new loans.

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