Monetary Policy Review - January 2014 - Bank Sentral Republik Indonesia
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October 26, 2014

A decision to maintain the BI Rate at 7.50% was taken at the BI Board of Governors’ Meeting on 9 January 2014, along with commitment to hold the Lending Facility rate and Deposit Facility rate at 7.50% and 5.75% respectively. An assessment of the overall economy in 2013 and the economic outlook for 2014-2015 demonstrated that such policy is consistent with ongoing efforts to steer the rate of inflation towards its target corridor of 4.5±1% in 2014 and 4±1% in 2015, as well as to help manage economic consolidation and thereby reduce the current account deficit to a level considered more sound. Additionally, Bank Indonesia will also continue to bolster its monetary and macroprudential policy mix, while concomitantly redoubling policy coordination with the Government to control inflation and the current account deficit, including policy to enhance the structure of the economy.

An evaluation revealed that the economy of Indonesia faced a number of arduous challenges throughout the past year of 2013 stemming from the global economic downturn. The economies of advanced countries slowed, which was followed by multiple growth corrections among emerging market countries. The sluggish global economy, in turn, deflated international commodity prices. Furthermore, ubiquitous global financial uncertainty propagated bearish sentiment surrounding the planned tapering off of monetary stimuli in the US. The latest developments, however, evidence improvements in the global economy driven by the US and Japan, coupled with early signs of recovery in Europe, China and India. Signs of improvement are expected to persist into 2014, hence propping up the Indonesian economy looking ahead, both in terms of the trade channel and financial channel.

A lacklustre global economy together with the need for national economic stabilisation policy affected economic growth in Indonesia. The economy of Indonesia was forecast to expand by 5.7% in 2013, which is slower than that posted in the previous year at 6.2%. The deceleration in economic growth during 2013 was partially blamed on limited growth in real exports as a result of the tepid global economy. In terms of domestic demand, investment growth, particularly non-construction investment, also slowed. Meanwhile, household consumption remained the primary driver of growth. Bank Indonesia considers the ongoing downward economic growth trend as congruous with the current direction of Bank Indonesia and Government stabilisation policy instituted to bring the domestic economy back towards a healthier and more balanced growth trajectory. Overall, measured stabilisation policy successfully offset economic growth in 2013, which still outpaced that recorded in other countries. In 2014, stronger economic growth is expected, around the lower end of the 5.8-6.2% range, in line with the ongoing domestic economic consolidation process towards more sustainable conditions.

The global economic downturn also placed additional pressure on the 2013 Indonesian balance of payments. Such pressures swelled the current account deficit to 3.5% of GDP compared to 2.8% in 2012. The growing current account deficit was primarily caused by a decline in non-oil/gas exports due to sluggish global economic growth and tumbling international commodity prices. Furthermore, the oil/gas account also recorded a larger deficit in line with unrelenting domestic demand for fuel. Pressure on the balance of payments also stemmed from a shrinking financial and capital account surplus, triggered by bearish sentiment following the Fed's plan to taper monetary stimuli as well as domestic expectations regarding the current account. The most recent economic developments indicate that the stabilisation policy implemented by the Government and Bank Indonesia improved BoP performance in the final quarter of 2013. The current account deficit will subside as the trade surplus grows due to growth in non-oil/gas exports as the global economy rebounds. Furthermore, non-oil/gas imports will ease in line with the sluggish domestic economy. Bank Indonesia considers the improving balance of payments in the final quarter of 2013 adequate to support domestic economic stability and steer the current account towards a healthier position. The improving balance of payments has led the increase foreign exchange reserves by US$ 99.4 billion on the December 2013, equivalent to 5.4 months of imports and servicing foreign debt, well above international standards of three months of imports.

Weaker BoP performance placed additional pressures on the rupiah exchange rate in 2013 and intensified volatility. Point-to-point, the rupiah slid 20.8% (yoy) in 2013 to a level of Rp 12,170 per US dollar, averaging 10.4% (yoy) depreciation in 2013 to a level of Rp 10,445 per US dollar. Depreciatory pressures were fiercest during the period from the end of May until August 2013, as capital flowed out of the country, triggering negative sentiment concerning tapering policy by the Federal Reserve, amid soaring domestic inflation in the wake of fuel price hikes as well as expectations for the domestic current account. Such a strong global influence manifested in rupiah depreciation in line with other currencies in the region. Bank Indonesia continues to maintain rupiah stability in accordance with economic fundamentals, thus supporting controlled economic consolidation. Better BoP performance, along with a shrinking current account deficit, will help stabilise the rupiah exchange rate and encourage potential rupiah appreciation looking ahead.

The rate of inflation in 2013 soared to 8.38% from 4.30% in 2012, exceeding the target corridor of 4.5±1%. The rise in inflation was primarily the result of domestic food price shocks as well as reductions in the subsidies on fuel at the end of June 2013. The unpopular fuel price hikes had a number of direct and second-round effects; nonetheless, inflationary pressures have gradually been brought under control and are currently much less intense than when fuel prices were raised in previous years. The policy response of Bank Indonesia, backed by close policy coordination with the Government to dampen the second-round effects of the hikes, helped ease inflationary pressures towards normal levels by September 2013. Looking ahead, Bank Indonesia asserts that inflation will remain under control and within its target corridor of 4.5±1% in 2014 and 4.0±1% in 2015. Bank Indonesia will continue to strengthen policy coordination with the central and local governments through inflation control teams (TPI and TPID) in order to help achieve the inflation target.

Financial system stability was well maintained, buttressed by dogged banking industry resilience throughout 2013. Amid a domestic economic slowdown and rupiah depreciation, the financial sector in Indonesia preformed soundly, especially the banking industry, with credit risk, liquidity risk and market risk all well mitigated. Credit growth eased towards the end of the year, achieving 21.9% (yoy) in November 2013 compared to 23.1% at the end of the previous year. The slowdown in credit growth was influenced by a sharp decrease in rupiah credit from 24.0% at yearend 2012 to 20.0% in November 2013. Bank Indonesia considers the deceleration in credit growth harmonious with the economic downturn and conducive to higher domestic interest rates. Bank Indonesia will continue to remain vigilant of financial system stability, including banking industry resilience, thereby ensuring its role in supporting sustainable and sound domestic economic consolidation.

Looking ahead, Bank Indonesia policy in 2014 will continue to focus on maintaining economic and financial system stability through a sound monetary, macroprudential and payment system policy mix. Monetary policy will remain consistently directed towards controlling inflation within its target corridor and bringing the current account deficit to a healthier level through interest rate policy and exchange rate stabilisation according to economic fundamentals. Strengthening monetary operations, managing flows of foreign capital and financial market deepening will be intensified in order to bolster the effective transmission of interest rate and exchange rate policy, while simultaneously enhancing the structure and capacity of the financial system to finance development. Macroprudential policy will aim to mitigate systemic risk in the financial sector as well as control credit growth and liquidity in line with macroeconomic stability management. Concerning the payment system, policy is directed towards developing a more efficient domestic payment system industry. The array of aforementioned policies will be further reinforced by policy coordination with the Government and relevant financial authorities.

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