JAKARTA: A cut in interest rates by Indonesia’s central bank may not be enough to give sluggish consumer spending a jolt, as weakness in purchasing power and a reluctance by banks to lend undercuts efforts to boost South-East Asia’s biggest economy.
Bank Indonesia (BI) on Tuesday unexpectedly cut its benchmark policy rate for the first time since October, bringing the rate down 25 basis points to 4.5%.
It also announced some plans to tweak credit rules in a bid to boost lending and consumption.
Josua Pardede, economist at Bank Permata, said he expected the average interest rates banks offered to remain above 10% by year-end despite Tuesday’s policy rate cut.
The central bank had already trimmed the benchmark six times by a total of 1.5 percentage points last year, to limited effect. Commercial banks only followed slowly by lowering their lending and deposit rates, but loan growth has remained weak partly because banks concentrated on tackling bad loans.
Consequently, economic growth in the country with 250 million people has failed to accelerate as policymakers had hoped. The second-quarter’s annual growth rate of 5.01% – the same as in the first quarter – highlighted how the economy is stuck in a lower gear.
“I think interest rates do not directly affect certain sectors,” said Jahja Setiaatmadja, the chief executive of Indonesia’s largest bank by market size Bank Central Asia.
“If you lower interest rates for working capital loans but sales have not risen, it wouldn’t result in demand for new loans,” Setiaatmadja told Reuters.
Policymakers have openly said they are confused over why people aren’t spending, with some officials calling it “a mystery”. Private consumption accounts for over half of Indonesia’s gross domestic product. — Reuters