Friday, January 13, 2012

BI holds policy rate, brushes off concerns of overheating

BI holds policy rate, brushes off concerns of overheating
Esther Samboh, The Jakarta Post, Jakarta | Fri, 01/13/2012 8:58 AM
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Bank Indonesia (BI) kept the benchmark interest rate at a record low 6 percent on Thursday in order to spur growth amid risks of global economic slowdown, brushing off concerns of overheating.

Central bank Governor Darmin Nasution said that inflationary pressure should not be a threat to economic growth this year as the economy was still growing within its capacity.

He said that Indonesia’s economic growth of about 6.5 percent last year was still considered healthy as the inflation rate remained relatively low.

“Even if we push the economic growth to 7 percent, inflation will remain on track. With better infrastructure facilities, the growth capacity would be even bigger,” he told a press briefing. Although the central bank saw “fast and outstanding” growth in the property sector, it does not consider it a “bubble”.

Several international financial institutions, including Deutsche Bank, have raised warning flags that Indonesia’s fast growing economy might overheat this year if monetary authorities are unable to ease growing inflationary pressures.

Analysts said that they were worried that the sharp increase in bank loans and the government’s plan to ban private cars from buying subsidized fuels would cause high inflation.

The consumer price index (CPI) peaked to a 20-month high of 7.02 percent in January 2011 but continued to ease to 3.79 percent in December of the same year, the lowest level in 20 months.

BI estimates the inflation rate will rise only to 5.44 percent this year. Keeping the benchmark rate at 6 percent, Darmin said, would still be “suitable” to help boost loan growth. Bank lending grew 26 percent as of November last year.

Darmin considered the high loan growth rate “normal”. He said even if lending growth reached 30 percent, it would not bring any problems to the economy because such high growth was needed to achieve the GDP growth target of above 6 percent.

“If we want to relate loan growth with a bubble, it won’t be suitable, because the 26 percent growth was caused by the sharp increase in lending for productive business purposes — investment and working capital loans,” he added.

Investment loan growth outperformed other types of lending, growing at 36 percent as of November, compared with working capital loans at 22.2 percent and consumer loans at 26 percent.

“Loan growth of 22 to 24 percent is needed to support economic growth of 6.3 to 6.7 percent [BI’s target]. One of the keys is to channel financing for infrastructure,” said Ryan Kiryanto, chief economist of Bank Negara Indonesia (BNI).

“Banks and business players should not be concerned, because the low BI rate of 6 percent is

BI deputy governor Halim Alamsyah said banks might target an average of 23.6 percent overall lending growth this year, a slight decrease from 26 percent forecast for 2011.

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