Clamor for Bank Indonesia to be more active in stimulating GDP intensifies

But the bank's efforts are are apparently underappreciated.

There has been plenty of noise lately about the need for Bank Indonesia (BI) to be more active in boosting GDP growth.

According to a research note from DBS, some of those who have called for an interest rate cut include advisers to president-elect Jokowi.

While the argument for a rate cut may have its own merits, the report noted that it believes BI's efforts to anchor financial market stability are often underappreciated.

BI has been consistent in its efforts to maintain financial market stabilitiy, following last year's emerging market selloff. Recently, BI announced several measures to deepen the onshore foreign exchange (FX) market.

Here’s more from DBS:

Among others, BI now allows early termination and net settlement for FX derivatives transactions. These are efforts to encourage the use of FX hedging instruments among local corporates, including major state-owned companies.

It is estimated that about 40% of local corporates with FX needs neither have dollar-dominated revenues nor practice hedging. Note that currency mismatch risk is also one reason why BI has been closely watching external debts, which reached a total of USD 290bn in July, about USD 50bn or which are short-term debts.

Ensuring financial market stability is indeed one important step to boost GDP growth. One reason why GDP growth momentum has moderated rather markedly in the past year is the fact that the rupiah has lost some 20% against the dollar since mid-2013.

A significant slowdown in investment growth is evidenced by the sharp fall in imports of capital goods.

Against this backdrop, the tight monetary policy stance is an important policy signal, amidst the lingering current account deficit problem.

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