BI 7-day Reverse Repo Rate Held at 4.75%<br /> BI Responds to External Uncertainty against a Stable Domestic Backdrop - Bank Sentral Republik Indonesia
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November 20, 2017

No. 18/94/DKom

The BI Board of Governors agreed on 16-17th November 2016 to hold the BI 7-Day (Reverse) Repo Rate at 4.75%, while maintaining the Deposit Facility (DF) and Lending Facility (LF) rates at 4.00% and 5.50% respectively. The policy is consistent with Bank Indonesia’s prudence in response to increasingly uncertain global financial markets in the wake of the US election against a stable domestic macroeconomic backdrop, reflected by low inflation and a narrower current account deficit. Furthermore, Bank Indonesia will continue to stabilise exchange rates in line with the Rupiah’s fundamental value while keep maintaining market mechanisms. Bank Indonesia considers existing monetary and macroprudential policy easing adequate to preserve national economic growth momentum. In addition, Bank Indonesia will continue to strengthen policy coordination with the Government to maintain adequate liquidity, bolster growth stimuli and support structural reforms, thus underpinning sustainable economic growth.

BI predicts the global economic recovery to persist, albeit slowly, but commodity prices to begin rebounding. Amid global uncertainty following the US election, the US economy has shown signs of recovery, reflected by GDP growth, stable unemployment and rising inflation. Consequently, the chance of a Federal Funds Rate (FFR) hike in December 2016 has increased. However, limited economic growth is expected in other advanced countries, including the European Union, overshadowed by political risks. In contrast, developing countries such as China and India are predicted to continue to drive the global economy. On the commodity markets, the global oil price remains low due to high OPEC production, while several major exports from Indonesia have seen their prices improve, including crude palm oil (CPO), coal, and various mining products. Moving forward, Bank Indonesia will continue to monitor the progress of transitions in the US Government as well as future US policies, especially those relating to fiscal, policy rate and international trade.

The domestic economy has continued to perform soundly on the back of maintained demand. Economic growth was recorded at 5.02% (yoy) in the third quarter of 2016, primarily supported by solid household consumption. In terms of investment, growth in construction is relatively good, on the back of ongoing infrastructure project development by the Government. On the other hand, private investment remains low, especially in the non-contruction sector, amid fiscal consolidation that pushed government consumption into negative territory. Regionally, however, robust economic growth was achieved on the islands of Java and Sumatra, while growth in Eastern Indonesia was noted to accelerate as mining exports surged and more smelters began operating. By sector, the manufacturing industry, agriculture and trade recorded positive growth. Bank Indonesia predicts more muted growth in the fourth quarter, in line with fiscal consolidation, at around 5%. Looking forward, however, the economy is projected to expand in the 5.0-5.4% range in 2017.

Indonesia’s balance of payments (BOP) recorded a larger surplus in the third quarter of 2016, supported by a narrower current account deficit combined with a growing capital and financial account surplus. The BOP surplus stood at USD5.7 billion, increasing significantly from USD2.2 billion last quarter. Such conditions are indicative of greater external balance and further bolster macroeconomic stability. The current account deficit was observed to narrow from USD5.0 billion (2.2% of GDP) in the second quarter to USD4.5 billion (1.8% of GDP) in the third quarter of 2016. A larger non-oil and gas trade surplus due to rising export prices, coupled with fewer oil and gas imports as well as a narrower oil and gas deficit as gas exports increased, contributed to the reduction. In addition, the services account deficit also decreased due to a growing travel services account surplus in the reporting period. On the other hand, the capital and financial account surplus increased from USD7.6 billion to USD9.4 billion over the same period, buoyed by positive sentiment concerning the promising domestic economic outlook. Consequently, the position of official reserve assets at the end of October 2016 stood at USD115.0 billion, equivalent to 8.4 months of imports and servicing government external debt.

The Rupiah continued to appreciate in the third quarter, on positive domestic and external sentiment, before halting in November, following the US election. On average, the Rupiah appreciated 1.39% to close at a level of Rp13,130 per USD. Additionally, Rupiah gains persisted into October 2016, strengthening a further 0.71% to Rp13,048. The Rupiah appreciation stemmed from positive sentiment surrounding the solid domestic economic outlook, in line with maintained macroeconomic stability and the successful implementation of the Tax Amnesty. Externally, however, the Rupiah strengthened as global risks eased on the back of clearer policy direction from the Federal Reserve concerning the next FFR hike. However, from the 1st fo 16th of November, the Rupiah depreciated by an average of 2.53% to Rp13,378 per USD as uncertainty reappeared after the US election. Nevertheless, depreciatory pressures on the rupiah were relatively limited compared to the currencies of other emerging market economies (EME). Consequently, the rupiah has appreciated by 2.97% (ytd) this year. Moving forward, Bank Indonesia will continue to stabilise exchange rates in line with the rupiah’s fundamental value by maintaining market mechanisms.

Inflation remains under control and is predicted around the floor of the 2016 inflation target of 4±1% in the 3.0-3.2% range. The Consumer Price Index (CPI) recorded inflation of 0.14% (mtm) or 3.31% (yoy) annually. Administered prices (AP) were the main contributor to inflation, led by rising electricity rates, household fuel prices, rail tickets and cigarette prices. In contrast, core inflation was recorded at 0.10% (mtm) or 3.08% (yoy) in line with limited domestic demand, anchored inflation expectations and Rupiah appreciation. On the other hand, volatile foods (VF) experienced deflation due to price corrections affecting several foodstuffs. Moving forward, policy coordination between Bank Indonesia and the Government will continue, however, with a focus on safeguarding supply and distribution, especially of the basic necessities, while managing inflation expectations.

Financial system stability was maintained along with banking system resilience. At the end of the third quarter of 2016, the Capital Adequacy Ratio (CAR) stood at 22.3% and the liquidity ratio (liquid assets/deposits) at 20.2%. Meanwhile, non-performing loans (NPL) were low and stable at 3.1% (gross) or 1.4% (net). The looser monetary policy stance up to September 2016 has successfully transmitted through the interest rate channel, as reflected by lower deposit rate (by 108 bps, ytd) and lending rate (by 60 bps, ytd). In contrast, however, monetary policy transmission through the credit channel remains suboptimal, in line with limited demand, including investment from the corporate sector. Credit growth was recorded at 6.5% (yoy) in Q3, decelerating from 7.9% (yoy) last period. Meanwhile, transmission through the capital market, including issuances of shares, bonds and medium-term notes (MTN), accelerated. Deposit growth stood at 3.2% (yoy), slowing down from 5.9% (yoy) the previous qarter. The slowdown is estimated to be transient, associated with the implementation of Tax Amnesty law, and will bounce back at the end of year. Bank Indonesia believes that the transmission of looser monetary and macroprudential policies will continue and, therefore, boost credit and other financing growth to support stronger economic growth moving forward.

Jakarta, November 17th 2016
Communication Departement

Arbonas Hutabarat
Director

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