[JAKARTA] Bank Indonesia (BI) kept its key interest rate unchanged for a third straight meeting as inflation slowed, remaining within the central bank’s target range.

BI maintained the rate at 6 per cent in the Wednesday (Jan 17) meeting, as indicated by 30 economists surveyed by Reuters.

Governor Perry Warjiyo said that the decision to keep borrowing costs unchanged is an effort to maintain the stability of the rupiah exchange rate and to ensure that inflation remains within the targeted range of 1.5 to 3.5 per cent for the year 2024.

He said that a stable exchange rate and low inflation could provide room for the central bank to reduce its benchmark rate, but clarified that the bank is not in a rush.

“We remain patient and will continue to be patient looking at domestic and global conditions,” he said at a press conference.

The rupiah was unchanged after the announcement to hold rates steady and traded around 15,640 per US dollar on Wednesday, down 0.34 per cent from a day earlier.

A NEWSLETTER FOR YOU

Friday, 8.30 am

Asean Business

Business insights centering on South-east Asia's fast-growing economies.

Sign Up

Last year, Indonesia saw core inflation eased to 2.5 per cent year on year from 2.8 per cent in 2022, slower than market expectations. The headline consumer price index (CPI) eased to 3.7 per cent from 4.2 per cent in 2022.

Analysts expect BI’s next move to be a cut, though some disagree on the timing, which may depend on the rupiah exchange rate’s stability.

Global uncertainty and volatility surrounding the path of inflation are also key reasons for the BI rate to remain unchanged in the first half of this year, according to UOB analysts.

“We also view that the upside risks from food inflation could still be a reason for inflation to moderate slower,” said UOB in its recent note.

OCBC forecast Indonesia’s average headline CPI will ease to 3.1 per cent, with monthly figures expected to remain within BI’s target.

With relatively benign inflationary pressures and contained external factors, OCBC expected BI will be able to maintain its policy rate at 6 per cent in the first quarter before initiating a cumulative 125 basis point cut in its policy rate starting in the second quarter.

Loan growth

The central bank maintained its forecast that economic growth would pick up in 2024 to within a range of 4.7 to 5.5 per cent, from 2023’s forecast of 4.5 to 5.3 per cent, on rising spending for a general election and as the current government rushes to finish infrastructure projects.

Warjiyo said the central bank will continue to inject liquidity into the banking industry this year by increasing macroprudential liquidity policy incentives and loosening the macroprudential liquidity buffer ratio.

Loan growth in Indonesia increased to 10.38 per cent in December last year, driven by a pickup in corporate loan demand. Lending to micro, small, and medium enterprises grew by 8.03 per cent annually, predominantly due to the subsidised microcredit programme. BI expected loan growth to pick up to between 10 and 12 per cent this year, driven by increasing demand for investment and working capital loans, Warjiyo said.

Indonesia has seen single-digit loan growth over the past two years as banks held back on disbursements to deal with a spike in bad loans due to a sluggish economy. This has often resulted in reduced access to loans for small businesses, deemed a greater risk than their more established counterparts.

Speaking at the BI annual meeting in November last year, President Joko Widodo called on local lenders to disburse more loans to small and medium enterprises to accelerate growth in the Indonesian economy. He urged banks to prioritise lending over putting any excess liquidity into government bonds or BI’s securities.