BI 7-Day Reverse Repo Rate Held at 4.75% Maintaining Balance Between Macroeconomic Stability and Domestic Economic Recovery - Bank Sentral Republik Indonesia
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November 20, 2017

No. 18/ 102 /DKom

The BI Board of Governors agreed on 14-15th December 2016 to hold the BI 7-Day (Reverse) Repo Rate (BI 7-day RR Rate) at 4.75%, while maintaining the Deposit Facility (DF) and Lending Facility (LF) rates at 4.00% and 5.50% respectively, effective December 16th 2016. The policy is consistent with efforts to optimize domestic economic recovery while maintaining macroeconomic stability, against a backdrop of uncertain global financial markets. Bank Indonesia believes that the previous monetary and macropudential policy easing will continue to boost domestic growth momentum. Moving forward, bank Indonesia remains vigilant of several risks, including those deriving from global economic uncertainties, especially relating to US and China policies, as well as domestic risks relating to adminitered prices inflation. Bank Indonesia will optimize policy mix in the fields of monetary, macroprudential and payment system to maintain a balance between macroeconomic and financial system stability with the ongoing economic recovery. Bank Indonesia will also strengthen policy coordination with the Government to manage liquidity, keeping low and stable inflation, bolster growth stimuli and ensure the success of ongoing structural reforms, thereby supporting sustainable economic growth.

The global economy was overshadowed by uneven economic growth and global financial markets filled with uncertainty. Global economic recovery remained slow, along with the sluggish growth in advanced countries, with the exception of the US economy, which continued to improve. The US economy improved on the back of a stronger labour sector and rising inflation, which prompted the Federal Reserve to raise its Federal Funds Rate (FFR) in December 2016, with a tendency to increase further 2017, potentially elevating the cost of borrowing in the global market. On the other hand, growth in emerging market economies (EME), particularly India and China, can be the motor of global economic growth and recovery in several commodity prices.The global oil price, while remain low, has shown potential signs of recovery after OPEC agreed to lower production. Similarly, the prices of several export commodities from Indonesia continued to rise, including crude palm oil (CPO), coal and other mined commodities. Moving forward, global risks demand vigilance, such as the uncertain fiscal and international trade policy direction of the United States, as well as the economic rebalancing and financial system restructuring process in China.

At home, the national economy performed solidly, underpinned by maintained domestic demand. Bank Indonesia predicts economic growth in 2016 to reach 5.0% (yoy), up from 4.8% (yoy) in 2015. The gains are supported by robust consumption and investment, particularly construction investment. Conversely, the export contraction persisted but has shown improvements in the fourth quarter of 2016. In 2017, however, the economy is predicted to enter a recovery phase, with corporate sector performance improving and supported by increased financing from banking loans and the capital market financing. Consequently, Bank Indonesia predicts economic growth in the 5.0-5.4% range, buoyed by solid domestic demand and an export recovery, along with the improvements in Indonesia’s export commocity prices.

Indonesia’s balance of payments (BOP) was estimated to record a relatively large surplus and the current account deficit was expected at a level below 2% of GDP. The large BOP surplus was supported by a significantly larger capital and financial account surplus, while the current account deficit was managed with the help of a large non-oil and gas surplus and a narrower oil and gas deficit. The position of official reserve assets at the end of November 2016 was recorded at USD111.5 billion, larger than the end of 2015 position of USD105.9 billion, although lower than the end of October 2016 position of USD115.0 billion. The position of forex reserves at the end of November 2016 was equivalent to 8.5 months of imports or 8.1 months of imports and servicing government external debt, which is well above the international adequacy standard of three months. In addition, the government’s plan to issue USD3.5 billion worth of global bond is expected to increase forex reserves on December 2016.

Rupiah exchange rates were stable and have tended to appreciate in 2016. Rupiah appreciation was maintained through to October 2016 but then derailed somewhat in November after the US presidential election. Point-to-point, the rupiah strengthened 1.7% (ytd) to a level of Rp13,550 per USD at the end of November 2016. The rupiah appreciated on positive sentiment concerning the domestic economic outlook in line with stable macroeconomic conditions and the successful implementation of the Tax Amnesty. Nonetheless, rupiah appreciation was halted in November 2016 due to widespread global economic uncertainty stemming from the US election and the expectation of FFR hike. Since the beginning of December, however, the rupiah appreciated again along with the foreign capital inflow. Looking forward, Bank Indonesia will continue to monitor the risk of a sudden capital reversal linked to the ambiguous US policy direction and implement exchange rate stabilisation measures in line with the rupiah’s fundamental value by maintaining market mechanisms.

Low inflation is predicted for 2016 in the 3.0-3.2% range, which is towards the floor of the current target corridor, namely 4±1%. Core inflation was supported by limited domestic demand, anchored inflation expectations and rupiah appreciation. Meanwhile, administered prices recorded deflation on the back of low energy prices. On the other hand, volatile food inflation accelerated due to supply disruptions caused by inclement weather. Furthermore, CPI inflation was also controlled by Bank Indonesia policy to maintain exchange rate stability and anchor inflation expectations, while strengthening policy coordination with the central and local Government. In November 2016, CPI inflation stood at 0.47% (mtm) or 2.59% (ytd) and 3.58% (yoy). With these developments, low inflation of around 3.0-3.2% is expected for the whole of 2016. Inflation in 2017 is predicted within the target corridor of 4±1%. Several inflation risk requires careful observation, especially relating to volatile food and the planned adjustments to administered prices. Therefore, Bank Indonesia will continue to strengthen coordination with the Government to control inflation, focusing on efforts to maintain supply and distribution of basic needs, and relating to the timing of administered prices adjustments.

Financial system remains stable, supported by the banking system resilience. In October 2016, the Capital Adequacy Ratio (CAR) stood at 22.9% and the liquidity ratio (liquid assets/deposits) at 20.2%. Meanwhile, non-performing loans (NPL) were recorded at 3.2% (gross) or 1.5% (net). The looser monetary policy stance was successfully transmitted through the interest rate channel, reflecting lower deposit and lending rates. Notwithstanding, monetary policy transmission through the credit channel remained suboptimal, in line with limited demand, including investment from the corporate sector. Credit growth in October 2016 was recorded at 7.5% (yoy), higher than September 2016 which was recorded at 6.5% (yoy), although down from 10.3% (yoy) one year earlier. On the other hand, economic financing increased through the capital market in the form of stocks, bonds and medium-term notes (MTN). Deposit growth accelerated from 3.2% (yoy) in September 2016 to 6.5% in October 2016. However, the deposit growth decelerated from the previous year, that was recorded at 9.0% (yoy). Moving forward, Bank Indonesia predicts credit and deposit growth in 2017 to improve, within the 10-12% and 9-11%, respectively, in line with increased economic activity and the loose monetary and macroprudential policy stance adopted.

Jakarta, December 15th 2016
Communication Departement

Tirta Segara
Executive Director

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