NH Investment & Securities has maintained its outlook that Indonesia will begin implementing fiscal policies aimed at stimulating consumption recovery in earnest from the second half of this year, and that the benchmark interest rate will be cut once per quarter.
On June 19, Um Seojin, a researcher at NH Investment & Securities, stated in the report "Indonesia (BBB): Fiscal Policy as a Response to Slowing Consumption" that "the central bank is not expected to shift to an aggressive rate-cutting stance."
Previously, the Bank of Indonesia had kept its benchmark interest rate unchanged at 5.5% in May. Um explained, "This decision is in line with market expectations," adding, "There are concerns not only about existing tariff policies but also about the recent rise in oil prices due to the Middle East conflict. The decision to hold rates steady appears to be due to high uncertainty."
Currently, Indonesia continues to face the problem of slowing consumption. Um pointed out that the Bank of Indonesia also emphasized the need to "increase the sources of domestic growth through household consumption and investment" at its latest meeting, highlighting the importance of consumption recovery. Indonesia's inflation rate in May was 1.6%, which is close to the lower end of the target range, while retail sales in April recorded -2.2%.
Nevertheless, Um does not expect the Bank of Indonesia to respond with aggressive monetary policy. He analyzed, "Since fiscal policies to support consumption recovery are expected to begin in earnest in the second half of the year, the central bank is unlikely to take aggressive action."
He noted, "Despite the prolonged period of high interest rates, the overall non-performing loan (NPL) ratio remains at a ten-year low, which is quite low, and only household NPLs have risen to the peak levels seen during the COVID-19 period. In other words, aside from the household sector, the high interest rate environment has not caused significant problems." In this situation, he explained, fiscal stimulus measures that can target specific beneficiaries would be more effective than adjustments to the benchmark interest rate, which affect the entire economy.
Um concluded, "Therefore, rather than adjusting the pace of rate cuts, we expect the impact of fiscal policy," and maintained the existing forecast that "the benchmark rate will be cut once per quarter in the second half of the year."
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