​Monetary Policy Report Quarter III 2018 - Bank Sentral Republik Indonesia
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August 05, 2020

​The BI Board of Governors agreed on 14th and 15th November 2018 to raise the BI 7-Day Reverse Repo Rate by 25 bps to 6.00%, while also raising the Deposit Facility (DF) and Lending Facility (LF) rates by 25 bps to 5.25% and 6.75% respectively. The decision reflects Bank Indonesia’s ongoing efforts to lower current account deficit within a manageable threshold. The policy rate hike is also aimed at strengthening the attractiveness of domestic financial markets by anticipating global policy rate hike in the next few months. In order to maintain flexibility and distribution of liquidity in the banking industry, Bank Indonesia raised the average reserve requirement (conventional and sharia) from 2% to 3%, as well as raising the macroprudential liquidity buffer (conventional and sharia) that can be repoed to Bank Indonesia, from 2% to 4%, each from deposit. Furthermore, Bank Indonesia has decided to maintain macroprudential policy without adjusting the countercyclical capital buffer (CCyB), namely remaining at 0%, and the Macroprudential Intermediation Ratio (MIR) in the 80-92% target range. Moving forward, Bank Indonesia will optimise its policy mix to safeguard macroeconomic and financial system stability, while strengthening policy coordination with the Government and other relevant authorities to maintain economic stability and bolster external resilience, which includes reducing the current account deficit to around 2.5% of GDP in 2019. The policy mix instituted by Bank Indonesia and the Government is expected to effectively dampen the impact of global economic gyrations by leaning against the global headwinds in order to maintain domestic economic resilience.

Bank Indonesia has also introduced rules for Rupiah interest rate derivatives, namely Interest Rate Swaps (IRS) and Overnight Index Swaps (OIS), in order to expedite further financial market deepening. This will provide alternative hedging instruments against domestic interest rate fluctuations. With the publication of IndONIA and efforts to strengthen JIBOR credibility, the policy is expected to produce transparent yield curves for the money market and bond market, while also strengthening monetary policy transmission and deepening the government and corporate bond markets. Details of the rules for Rupiah interest rate derivatives is in the attached document. Global economic growth is flat and uneven, accompanied by widespread uncertainty blighting the global financial markets. Solid economic gains achieved in the United States throughout 2018 will be restrained by consolidation in 2019. Nevertheless, inflation expectations in the United States remain high and analysts expect the US Federal Reserve to continue raising its policy rate. In Europe, economic growth tend to slowdown amid inflation hike trend. The current monetary policy normalisation in Europe, done by reducing purchase of financial assets, is expected to continue. In the emerging markets, economic downturn in China stems from deleveraging in the financial system coupled with the escalating trade war with the United States (US). Global economic plateau and the worsening trade tension will cause the world trade volume (WTV) to remain low. Furthermore, international commodity prices are tracking a sliding trend, including the global oil price due to potentially higher supply.

Despite global economic moderation, Indonesia’s national economy posted solid growth in the third quarter of 2018, namely 5.17% (yoy), on the back of domestic demand. Domestic demand accelerated from 6.35% (yoy) in the second quarter of 2018 to 6.40% (yoy) in the reporting period, induced by robust investment growth in government infrastructure projects, including building and non-building investment. In contrast, net exports are negative in line with dwindling global demand despite persistently high import growth to meet domestic demand. In turn, negative net exports were a drag on economic growth, which decelerated from 5.27% (yoy) in the second quarter of 2018. Regionally, however, national economic growth was backed by faster growth reported in Java, Sumatra and Kalimantan. For the year, therefore, Bank Indonesia projects economic growth at 5.1% in 2018.

Indonesia’s current account deficit increased in the third quarter of 2018 on stronger domestic demand. The current account deficit was recorded at USD8.8 billion (3.37% of GDP) in the third quarter of 2018, up from USD8.0 billion (3.02% of GDP) in the previous period. A growth surge of imports destined to government infrastructure projects, which will boost future economic productivity, has enlarged the current account deficit. On the other hand, the capital and financial account recorded a significant surplus in the third quarter of 2018, totalling USD4.2 billion, backed by an influx of direct investment. Throughout 2018, current account deficit is projected to remain within a save threshold, under 3% of GDP. The position of FX reserves stood at USD115.2 billion at the end of October 2018, equivalent to 6.4 months of imports or 6.2 months of imports and servicing government external debt, which is well above the international standard of three months.

The Rupiah movement remained in line with market mechanism and supporting external sector rebalancing towards economic sustainability. The Rupiah succumbed to depreciatory pressures in the third quarter of 2018 and during October 2018 before rebounding in November 2018. Point to point, the Rupiah depreciated 3.84% in the third quarter of 2018 and by 1.98% in October 2018 as a corollary of global economic uncertainty. The Rupiah rebounded in November 2018, however, due to foreign capital inflows to the country, drawn by conducive domestic economic dynamics and financial market policy, as well as positive sentiment surrounding the midterm elections in the US. The foreign capital inflows affected all financial assets, including the stock market. As of 14th November 2018, the Rupiah had depreciated by 8.25% (ytd) this year, which is less than the depreciation experienced in Turkey, South Africa, India and Brazil. Bank Indonesia will remain vigilant of global financial market uncertainty, while continuing to stabilise Rupiah exchange rates in line with the currency’s fundamental value and maintaining market mechanisms, backed by financial market deepening efforts.

Low and stable inflation has been maintained within the 3.5±1% target range. October 2018 inflation was controlled at 0.28% (mtm) or 3.16% (yoy), reversing the 0.18% (mtm) deflation or 2.88% (yoy) recorded the month earlier. The main contributors to inflation in October were volatile foods (VF) and administered prices (AP), while core inflation remained stable. Rising food prices edged up VF inflation and price adjustments to non-subsidised fuels pushed up AP inflation. On the other hand, core inflation was relatively stable at 2.94% (yoy) compared with 2.82% (yoy) the month earlier. Controlled core inflation is linked to policy consistency by Bank Indonesia with regards to anchoring rational inflation expectations to the target corridor, including maintaining Rupiah exchange rates in line with the currency’s fundamental value. Cumulatively, therefore, inflation in October 2018 was recorded at 2.22% (ytd). Bank Indonesia predicts low headline inflation to be maintained in 2018 at around 3.2% (yoy). Bank Indonesia will continue to strengthen policy coordination with the Central Government and Regional Administrations in order to control low and stable inflation.

Financial system stability has been maintained as the bank intermediation function improves and the banking industry effectively contains credit risk. Capital Adequacy Ratio (CAR) of the banking industry was reported at 22.9% and the liquidity ratio at 19.2% in September 2018, up from 18.3% in August 2018. In addition, the banking sector maintained a low level of non-performing loans (NPL) at 2.7% (gross) or 1.2% (net). In terms of the intermediation function, credit growth was reported to accelerate from 12.1% (yoy) in August 2018 to 12.7% (yoy) in September 2018, while deposit growth ticked downwards slightly from 6.9% to 6.6% (yoy). On the other hand, economic financing through the financial markets, such as initial public offerings (IPO) and rights issues, corporate bonds, medium-term notes (MTN) and Negotiable Certificates of Deposit (NCD), reached a cumulative total of Rp168.1 trillion (gross) as of September 2018, which is below the Rp205.9 trillion (gross) recorded in the same period last year. Consequently, Bank Indonesia projects credit growth in 2018 at approximately 12.0% (yoy), while deposit growth is predicted to slow down to appoximately 8% (yoy). Bank Indonesia will continue to monitor liquidity adequacy and distribution in the banking system, consistent with efforts to contribute in maintaining financial system stability.

Solid domestic economic performance is backed by uninterrupted cash and noncash payment systems. In terms of cash payments, the position of currency in circulation increased to 10.7% (yoy) from 1.2% (yoy) in the previous period. Regarding wholesale noncash payments, the average daily growth of high-value transactions settled through the Bank Indonesia – Real Time Gross Settlement (BI-RTGS) system declined to 2.3% (yoy) in the reporting period compared with 6.33% (yoy) previously. Meanwhile, noncash transaction value settled through the National Clearing System (SKNBI) was recorded at 7.3% (yoy), up from 3.08% (yoy) in the previous period. Retail transactions through ATM, debit and credit cards as well as e-money accelerated in the third quarter of 2018 from 9.6% (yoy) to 12.1% (yoy). Furthermore, e-money transactions soared 300.4% (yoy) in the third quarter of 2018 as consumers are becoming more inclined to transact through FinTech and e-commerce platforms. Bank Indonesia will continue to ensure the exceptional operational availability of the payment systems operated by Bank Indonesia and the industry, thus supporting macroeconomic stability.



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