The governor of Indonesia’s central bank said on Friday there should be room to loosen monetary policy further, but cautioned that lenders might face a near-term liquidity squeeze due to increased government bond issues.
On Thursday, Bank Indonesia cut its benchmark interest rate for the first time in 11 months by 25 basis points to 7.25%. The bank has previously reduced commercial lenders’ reserve requirements and relaxed some lending rules in order to lift up sagging economic growth, Reuters reported.
But despite the rate cut, BI said market liquidity could still tighten because of “government operations” and slower growth of banks’ deposits.
“In general, the condition is a bit tighter,” said Governor Agus Martowardojo, referring to banking liquidity. “BI will respond with monetary operation to ensure enough liquidity is in the market. We can do monetary expansion if needed.”
Deputy Governor Mirza Adityaswara said the bank has already taken some steps to stabilize money markets when the overnight interbank rate spiked in December due to issuance of some government bonds to pre-fund the 2016 budget.
Last year, the government increased net bond issuance by more than 20% from what it planned as a plunging resource receipts made the budget deficit balloon to 2.8% of gross domestic product, the highest level in at least 25 years.
This year, the government plans to raise Rp 372.2 trillion ($26.8 billion) by selling bonds, excluding treasury bills for cash management and buy-backs. Most of the issuance will be done in the first half of 2016.
The central bank said it may cut its benchmark rate again in the coming months to further loosen monetary conditions, but that will hinge on global market conditions.
Meanwhile, Indonesia’s trade balance moved back into surplus in 2015, after three years of deficits, but the turnaround mostly showed how sluggish the economy has been.
Southeast Asia’s largest economy posted a $7.51 billion surplus in 2015, chiefly because of a nearly 20% plunge in imports, underlining weak domestic consumption and investment. Every month had a surplus except November and December, when imports fell less than earlier.
In 2014, Indonesia had a deficit of $2.2 billion.
