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Increase in Bank Indonesia Interest Rates Still Required

Increase in Bank Indonesia Interest Rates Still Required
QUX.ME - National Economic and Industrial Committee (KEIN) views the increase in BI-7 Days Reverse Repo Rate, aka the central bank's benchmark interest rate, is still needed considering that some indicators of economic conditions are still not stable.

Deputy Chairperson of the National Economic and Industrial Committee (KEIN), Arif Budimanta, said that there would be no reversal of the flow of foreign capital which had so far returned to the country.

"This capital flow must remain a concern, so that the reduction in benchmark interest rates is not the right policy for the current conditions," he said on Monday (4/3).

Arif said further, the determination of the benchmark interest rate was not only based on controlled inflation and good economic growth. As is known, the inflation rate was quite low, where the Consumer Price Index (CPI) in February recorded a deflation of 0.08 percent. However, the negative trade balance and current account deficit must also be considered.

This condition is also aggravated by credit growth which is greater than the growth of third party funds (TPF). Based on data from the Financial Services Authority, bank credit growth from 2017 to 2018 is 12.05 percent. Meanwhile deposits growth was only 6.45 percent. The loan to deposit ratio at the end of 2018 is 94.78 percent.

"So it is clear that some indicators of economic conditions are still heavy. Therefore, it is still deemed necessary to raise the benchmark interest rate in the country, "said Arif.

In addition, deposit and savings rates are far lower than private bonds, state-owned enterprises, and even government bonds so that if the benchmark interest rate is not raised, it is feared that the public will look for other places to save their funds. It is better, continued Arif, that bank lending rates should be suppressed if it is intended to provide stimulus to the economy.

Arif explained that bank lending rates could be reduced through a number of ways including the efficiency of operational costs to the extent of the more competitive Minimum Statutory Reserves (GWM) so as not to overload the banks.

"So this is not the right time to reduce the benchmark interest rate. However, if Bank Indonesia wants to stimulate the economy through interest rate policies, banks' interest rates should be suppressed so they can encourage the real sector," he explained. (*)