BI Lowers Interest Rates Assessed As A Directed Step To Drive Growth

Bank Indonesia (Photo: Doc. VOI)

JAKARTA - Bank Permata economist Josua Pardede stated that the decision of the Board of Governors' Meeting (RDG) of Bank Indonesia (BI) to lower policy interest rates by 25 basis points (bps) and cut more in the interest rate of deposit facilities by 50 bps is a directed step.

According to him, this policy aims to accelerate the reduction in banking costs and encourage the engine of economic growth, while maintaining inflation expectations and stability of the rupiah exchange rate.

"BI-Rate has been decided to drop to 4.75 percent, Deposit Facility has dropped to 3.75 percent, and Lending Facility to 5.50 percent; a design like this lower limits on the interest rate range so that funds do not feel at home parked in BI, so banks are encouraged to lower deposit interest and, in turn, credit interest," he said in his statement, Thursday, September 18.

Josua said that this policy was also accompanied by the expansion of liquidity and intervention in the money market to ensure that policy transmission was running real, not just giving a signal.

He added that throughout this year, the total BI interest rate cuts have reached 125 bps, this is done by considering the easing space that is still available and domestic economic growth which is still below its potential.

However, Josua reminded the importance of caution because there are three main sources of risk, namely food price pressure, which can arise due to supply disruptions or soaring demand, has the potential to reduce easing space.

Next, pro-growth fiscal boosts, such as placing government funds in banks, could cause price pressure if not offset by increasing the supply of goods and services.

Furthermore, the uncertainty of financial sector regulations, which could affect market perceptions and capital flows.

"So the route is not an aggressive easing, but a gradual adjustment that always considers the stability of the rupiah and the dynamics of actual inflation," he said.

Josua said that cutting the BI interest rate was a decision in accordance with current economic conditions where inflation was low, weak demand, and had not yet recovered credit growth, with external stability maintained.

According to him, this step is expected to reduce the cost of funds, accelerate the reduction in credit interest rates, and encourage recovery in consumption and investment.

"In the future, BI's consistency in maintaining the rupiah, the continuation of pro-market monetary operations, and synergy with fiscal policy are the keys so that the benefits of cutting really flow into the business world and households without sacrificing the stability of the economy that has been built," he concluded.