Jakarta. Citibank Indonesia CEO Batara Sianturi forecasts that the Federal Reserve will cut interest rates in the second half of the year, providing a boost to the banking sector.

Batara emphasized that the sector has navigated uncertainty well, having gone through a presidential election and successfully closing the first semester.

Looking ahead to the second half of the year, Batara noted several factors to watch, particularly the direction of the Federal Reserve's interest rates, which could influence Bank Indonesia to lower its benchmark rate. Currently, Indonesia's benchmark interest rate is at 6.25 percent, while the Fed's rate is between 5.25-5.5 percent.

Batara mentioned that the Fed's dot plot suggests a possible rate cut in September, which could give Bank Indonesia room to reduce its rates, though this heavily depends on the Fed's actions.

"Citi's house view is that Bank Indonesia will cut rates only after the Fed does, and the cuts may not be as substantial as those by the Fed for 2024 and 2025," he told B-Universe on Wednesday.

According to CME Group's FedWatch tool, the probability for a rate cut to 5-5.25 percent from the current rate at the Fed's September meeting is at 59.9 percent.

Bank Indonesia reported a national banking credit growth of 12.15 percent year-on-year as of May, with liquidity maintained at around 25 percent of liquid assets to third-party funds. Additionally, the Gross NPL ratio stands at 2.3 percent, and the net NPL ratio is below 1 percent.

"Therefore, liquidity, portfolio quality, and capitalization are well-maintained, with our capital adequacy ratio (CAR) at 25 percent, which is sufficient for the banking sector," Batara said.

He also pointed out the need to monitor the micro, small, and medium enterprises sector, where NPL growth is around 4 percent. The termination of Covid-19-related relaxation policies in Q1 2024 should also be taken into account. "Ultimately, it all depends on the Fed," he said.

He said that the potential impacts of a Fed rate cut this year, such as boosting credit growth and lowering the cost of funds, thereby supporting the real sector. "We also hope that a rate cut in the US will help mitigate volatility in the rupiah against the dollar," he concluded.

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