BI Rate cuts helped boost lending in 2007, says bank

The Jakarta Post, Jakarta

The 1.5 percent cut in Bank Indonesia's benchmark interest rate, the BI Rate, throughout last year has jacked up loans extended from the banking sector, the central bank announced Tuesday.

Bank Indonesia governor Burhanuddin Abdullah said a series of BI Rate cuts last year had pushed down the bank lending rate and thus boosted lending demand.

"By the end of 2007, we had cut the BI Rate by 150 basis points, or 1.5 percent, from 9.5 percent at the beginning of the year. This has had a positive response from the business world in line with the declining trend in bank lending interest rates," Burhanuddin said.

In November for instance, Burhanuddin said, the interest rate for working capital loans and investment loans averaged 13.16 percent and 13.19 percent, respectively. At the start of the year, they stood at 16.39 percent and 17.58 percent.

Lower borrowing costs consequently boosted bank loans, Burhanuddin said. "By the end of November last year, bank lending reached Rp 1,004.6 trillion, growing by 20.6 percent from early 2007."

In 2007, Bank Indonesia targeted 18 percent growth in bank lending for the year.

The higher-than-targeted lending growth was, according to Burhanuddin, a reflection of the good overall showing of the banking sector.

By the end of November, the loan-to-deposit ratio stood at 69.9 percent, its highest level since the financial crisis.

Even with the significant growth in loans, banks remained prudent, Burhanuddin added, as shown by the decline in net non-performing loans from 3.63 percent at the start of the year to 2.29 percent.

Robust lending helped the economy to expand by an estimated 6.3 percent in 2007, also the fastest growth rate since the crisis.

"The (economic growth) achievement is significant amid the U.S.'s mortgage credit woes, which triggered international financial market turmoil, and the rise in oil prices," said Burhanuddin.

Despite the good economic signs however, the central bank in its first board of governors' meeting on Tuesday decided to leave the BI Rate unchanged at 8 percent, on the heightened inflationary pressure in 2008 resulting in part from the still high oil prices.

Inflation in December rose 1.1 percent from a month earlier, more than six times the 0.18 percent pace in November, data from the Central Statistics Agency shows.

Inflation could go beyond the targeted 6 percent "if the government doesn't take such measures as improving distribution channels," Burhanuddin said.

The government's 2008 inflation target is 6 percent. In 2007, full-year inflation reached 6.59 percent.