Indonesian banks have no more room for rate cuts in 2018

Cutting their reference rate twice in June and September 2017 is enough.

DBS Research economists believe that there is no more room for further lending rate cuts in 2018 after lowering it twice in 2017. They even expect a one-time rate hike at the end of the year.

Unexpected by the market, Indonesia cut its reference rate from 4.75% in July 2017 to 4.25% in September 2017. The move was then followed by a lower rate by Indonesia's Deposit Insurance Corporation to 6% in September from previously 6.25%. Collectively, these should result in a corresponding reduction of cost of funds in 4Q17.

According to DBS, as deposit rates adjust faster than lending rates, the banks should enjoy temporary NIM uplift following the two policy rate cuts in 2017. NIM pressure, however, will be present in 2018 when the lending yield starts to adjust lower. Expansion to the lower-yielding sectors might then put further pressure on loan yields.