Interest rates still steep: monetary policy is failing

Anthony Budiawan Managing Director of Political Economy and Policy Studies (PEPS)

IO – The 2020 global economic crisis hit the world. Including Indonesia. The economic crisis in Indonesia has entered a recession, starting the first quarter of 2020, with negative economic growth for two consecutive quarters compared to the previous quarter. 

The Indonesian economy contracted in the first quarter and the second quarter of 2020, compared to the previous quarter. Growth in the first quarter was minus 2.41 percent against the fourth quarter of 2019. And the growth in the second quarter of 2020 was minus 4.2 percent compared to the first quarter of 2020. Therefore, Indonesia has officially entered a recession. 

The economic crisis caused people’s consumption (demand) to fall sharply, causing production to also drop, triggering many factories and production lines to close. And there was a wave of layoffs which in turn will make people’s consumption plummet again, and so on: a vicious circle. The vortex that will drive Indonesia’s economy downward is entering the brink of a prolonged recession. 

Facing a situation like this, monetary policy is one of the key policies to curb the recession. However, the current monetary policy is very slow, and not at all effective. The Bank Indonesia (BI) benchmark interest rate (BI-rate) has only fallen 1 percent since January 23, 2020, until now. It has decreased by 0.25 percent on February 20, 2020, March 19, 2020, June 18, 2020, and last on July 16, 2020. And it has remained at a level of 4 percent until now. 

 Central banks in developed countries have aggressively lowered their benchmark interest rates. The US Central Bank (The Fed) lowered its benchmark interest rate (the Fed-rate) by 1.5 percent in just under two weeks: down 0.5 percent on March 3, 2020, and down 1 percent on March 15, 2020, making it close to 0 percent now. 

The Bank of England also lowered its benchmark interest rate aggressively. It decreased from 0.75 percent to 0.25 percent on March 16, 2020. Then, after only three days, it decreased again to 0.1 percent on March 19, 2020. 

Even some ASEAN countries also have low benchmark interest rates to withstand this recession. Singapore’s benchmark interest rate is close to 0 percent. Thailand is only 0.5 percent. Malaysia 1.75 percent. 

Amid a global recession like this, the BI-rate only drops 0.25 percent each time it is reset. A monetary policy like this clearly shows that there is no sense of crisis. BI failed to detect that economic conditions would fall sharply into the abyss of recession. Failure to implement the necessary monetary policy in times of a pandemic. 

A reduction in the benchmark interest rate is very important to increase the amount of liquidity and stimulate a sharp rise in consumption. If this is still lacking, BI can implement Quantitative Easing (QE) policies. By buying certain government bonds or corporate bonds on the secondary market (open market operation). 

Cheap liquidity from BI through QE can then be channeled into loans to companies or for consumption. Or to buy government bonds to finance the budget deficit. In this way, the interest on government debt securities will also drop dramatically, thereby lightening the burden on state finances. 

Unlike now, the interest rates charged to the public are left painfully high, but Bank Indonesia and the Ministry of Finance are conspiring to finance state debt securities at 0 percent interest through burden sharing, which is just a trick to “print money”. 

The benchmark interest rate will have an impact on the commercial loan interest rate. At this time, the interest rate on commercial loans in Indonesia is at least 8 percent, some even above 10 percent. Very high. So that many customers (debtors) cannot pay loan interest. Both corporate customers and individual customers. 

The OJK (Financial Services Authority) indeed issued a policy of relaxing postponement of loan interest payments. But this is also a useless policy. This policy does not help debtor customers at all, as they still have to pay these high-interest obligations. Because in times of crisis, it is not a postponement of obligations that is necessary, but a regime of low-interest rates to stimulate demand, to increase public consumption and investment. 

Postponement of the interest payment obligation only benefits the Banks. They can get liquidity assistance from the government or Bank Indonesia, while still making enormous profits amid this recession. BCA still made a profit of IDR. 12.24 trillion in the first semester of 2020. It only decreased by 4.8 percent compared to that of the first semester in 2019. Mandiri is still reaping IDR 10.29 trillion profit. BRI still earned IDR 10.2 trillion in profit. 

All the big banks are still making big profits amid the pandemic. Companies and individual customers are enduring this economic recession with high interest. Hundreds of trillions of public and state money have evaporated to pay interest rates on loans. As a result, BI and OJK failed to oversee the reduction in loan interest rates. Why? Is there a mafia in the banking world that keeps interest rates high?