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Monetary Watch 31 Agustus 2017
September 04, 2017 09:16

Interest rates have finally been cut again. After rates were kept stable at 4.75 percent for 9 months (rates were last cut in October 2016), BI finally resumed its policy of monetary easing by lowering interest rates at its monetary policy meeting on 21 – 22 August. The 7-Day RR rate was cut from 4.75 to 4.50 percent, while the Deposit and Lending Facility rates were reduced from 4.00 to 3.75 percent and from 5.50 to 5.25 percent, respectively. The rate cuts can be expected to encourage banking intermediation which, in turn, will help to give a boost to economic growth.

From the last week of July until the third week of August, or just before BI cut interest rates, the interbank interest rate (as proxied by the JIBOR O/N rate) moved in an upward trend. The JIBOR O/N rate rose gradually from 4.37 percent on 24 July to 4.45 percent on 21 August. However, after BI lowered the 7-Day RR rate, the JIBOR O/N rate then declined to 4.13 percent on 23 August and to around 4.10 percent presently. We expect the JIBOR O/N rate to remain stable at around this level in September as no further interest rate cuts are expected for the foreseeable future.

In June, deposit rates (including the 3 month deposit rate) were flat. Nonetheless, the surprise decision by BI to cut rates in August will provide a catalyst for further declines in deposit rates. In addition, we also expect LPS to cut its rate. Based on our impulse response analysis, banks can be expected to cut their deposit rates by up to 15 bps with a lag of three months.

Lending rate s, meanwhile , fel l 3 bps. Assets qual ity showed l i t tle improvement with NPLs at 3.0 percent in June. Now that the benchmark rate has been cut again, we expect credit rates to decline with a lag of two months, albeit half the decline in deposit rates.