Bank of Indonesia rolls out surprise rate cut as credit growth tumbles

The regulator is likely to ease further, analysts say.

The weak demand for credit is a key factor behind the Bank of Indonesia's decision to trim its policy rate by 25 bps on June 17, analysts say.

"BI has deemed the Indonesian economy to be in greater need of support than before. There are nonetheless enough concerns about weak economic momentum for it to cut rates today. This is especially so, given that credit growth has remained lacklustre. Today’s statement, for instance, noted that 'transmission via credit channel is not yet optimal', credit growth dropping back again from March’s 8.7%yoy to 8.0% in April," OCBC economist Wellian Wiranto said in a report.

Apart from cutting rates, BI is also trying to spur credit growth by easing macroprudential measures. For instance, the regulator has rolled out better loan-to-value and financing-to-value ratios for banks that have NPLs of less than 5%.

The central bank has also raised the lower limit of loan-to-financing ratios for banks, from 78% to 80% starting from August this year, in a bid to get banks to play ball in extending more loans.

“Going forward, it appears that BI is still keen to ease further. We think that it will cut rate by at least one more time, by 25bps, this year. In case it cannot enjoy the space to cut policy rate because of global factors, we believe that BI will nevertheless continue to signal an easing bias to further prod the banking sector in extending credit more. It has already talked about broadening today’s loosening of macroprudential measures to vehicle financing, for instance. There is also a potential slashing of reserve requirement ratio that it can utilize,” the report noted.