President Susilo Bambang Yudhoyono asked Indonesian banks to cut borrowing costs "immediately" to help sustain growth, as the central bank said it had held talks with financial-service companies to encourage cheaper loans.
"I know that banks need to improve their businesses, but I ask banks to also see other sectors, such as the manufacturing sector, because that too is important for our nation's economic progress," Yudhoyono said on Tuesday. Yudhoyono, who will seek re-election this year, is counting on local demand to sustain growth at 4.5 percent in Southeast Asia's biggest economy in 2009, after 6.1 percent growth last year. Bank Indonesia, the central bank, has encouraged lenders to cut borrowing costs in a "prudent manner," said BI Senior Deputy Governor Miranda Goeltom. "Banks are playing it safe. They have been refraining from lending and that is stalling the economy," said Syafrien Anwar, head of research at PT Lautandhana Securindo. "BI may need to provide other incentives." BI has cut the policy rate to 7.75 percent, lowering it for four straight months to support growth. The base lending rate, an indicator for banks to set their lending rates, fell to 16.19 percent on Tuesday, from 16.62 percent on Dec. 31, according to BI data. "Lending is about confidence," Goeltom said. "We are actively talking to bankers now and giving inputs needed by the bankers. Banks should start lending." BI has room to cut its policy rate further as inflation eases, Goeltom said. Still, the lower rates may not encourage banks to boost lending, economists have said. "Monetary policy is now a relatively less effective signaling tool as market rates and policy rates stay diverged," Morgan Stanley economists Chetan Ahya, Deyi Tan and Shweta Singh said in a client note on Monday. "The central bank's intervention to curtail currency vulnerability could aggravate liquidity conditions." BI in February forecast credit expansion of 15.6 percent this year, about half the pace of lending growth in 2008. Bloomberg
