Widodo asks for lower interest rates

Indonesia is looking to end its protectionist tradition. Source: Wikimedia

Indonesia’s President Joko Widodo is hoping to boost economic growth and create a stronger industrial sector by lowering interest rates but he says the independence of the central bank prevents him from making the changes.

“I would like to see a lower interest rate but I cannot force Bank Indonesia [BI] to cut the interest rate because they are independent and the government respects the way Bank Indonesia conducts monetary policy,” Widodo said.

He said he was optimistic that the government’s target of GDP growth of 5.3 per cent this year could be achieved after a fall to a still-impressive 4.8 per cent last year.

To boost growth, the BI reduced its benchmark policy rate by 25 basis points to 7.25 per cent in January in its first change in interest rates in 11 months. The BI also sliced its lending facility rate and deposit facility rate by the same amount.

Observers are expecting more rate cuts.

HSBC economic adviser Lim Su Sian said: “Taking a month or two out between rate cuts gives the central bank some time to properly assess the effects of its January easing, as well as the government’s restructuring efforts via the various ‘stimulus’ packages. We look for the BI to cut its policy corridor by 25 basis points in the second quarter, taking the reference rate 7 per cent by year-end.”

The rupiah jumped 1.5 per cent to a four-month high of 13,400 per US dollar on Wednesday, as investors approved of signs of liberalising reforms.

The benchmark Jakarta Composite index dropped 0.76 per cent, tracking a wider Asean selloff.

Jakarta would loosen restrictions on foreign investment in several sectors, he added.

“We are seriously considering deregulation across the board but focusing on e-commerce, health-care and creative industry,” Widodo said. His cabinet is set to discuss changes to the “negative investment list”, which names sectors where foreign investment restrictions apply.

“Our commitment is to [boost] competition,” he added. “For me, competition is very important. If we have already launched our deregulation, the bureaucracy and the system must follow the new rules.”

Trade Minister Thomas Lembong announced that the retail sector would see foreign-investment rules relaxed.

Jakarta is reportedly trying to reverse protectionist policies that have inhibited foreign trade and investment.

“The ‘negative investment list’ is a long list so if more sectors get liberalised, it will be positive for foreign direct investments (FDIs),” Singapore-based Nomura economist Euben Paracuelles said.

“There’s been quite a lot of discussions within the cabinet regarding revisions to the list. I think it’s quite likely they will go ahead with this,” the economist added.