No.20/51/DKom
The BI
Board of Governors agreed on 28-29th June 2018 to raise the BI 7-day
Reverse Repo Rate by 50 bps to
5.25%, while also raising the Deposit Facility (DF) and Lending Facility (LF)
rates by 50 bps to
4.50% and 6.00%
respectively, effective 29th
June 2018. The policy raise hike decision is Bank Indonesia’s
pre-emptive, front-loading, and ahead of the curve move to maintain the
domestic financial market’s competitiveness against several countries’ changing
monetary policies as well as high global uncertainty. The policy is
still backed by dual intervention
policy in the foreign exchange market and government securities (SBN) market as
well as the monetary operations strategy to maintain adequate liquidity,
particularly in the rupiah money market and interbank swap market. Bank
Indonesia is confident that the policy measures will effectively strengthen
economic stability, specifically the Rupiah
exchange rate stability.
Moving forward, Bank Indonesia will continue to monitor the domestic and global
economic developments and outlook, to
strenghten future policy mix responses.
Bank
Indonesia also implemented accomodative macroprudential policy by relaxing
the loan-to-value (LTV) ratio in order to maintain domestic economic recovery
momentum and financial system stability, keeping into account the prudential
principles and consumer protection. The policy, effective on 1st August 2018,
is applicable to the property sector as follows: (i) relaxing the LTV ratio for
property loans and FTV ratio for property financing; (ii) relaxing the number
of credit or financing facilities available through the pre-order mechanism;
and (iii) amending the stages and limits applicable to liquidate
loans/financing. The policy is expected to stimulate the property sector, which currently still has a
potential to accelerate and
significant multiplier effect on the national economy (Appendix 1).
Furthermore, the macroprudential policy also reinforces previous
macroprudential policies concerning the Macroprudential Intermediation Ratio
(MIR) and Macroprudential Liquidity Buffer (MLB), which aim to catalyse the
bank intermediation function and strengthen bank liquidity management. The
policy move is also synergised with implementation of the average rupiah
reserve requirement as part of Bank Indonesia’s efforts to reformulate the
monetary policy operational framework, thereby increasing liquidity management
flexibility in the banking industry and nurturing the bank intermediation
function, while supporting financial market deepening. The three policies will
become effective on 16th July 2018 for conventional
banks and 1st October 2018 for sharia banks (Appendix 2 and 3).
The
global economy faces tighter liquidity as uncertainty blights the financial
markets amid persistent international economic gains projected in 2018.
The global economic growth
projection has been upgraded from 3.8% to 3.9% on the back of US economic
gains, solid growth in Europe and resilient growth in China. The promising
global economic outlook is expected to induce the increasing world
trade volume, thus maintaining high international commodity prices. Nevertheless, global liquidity tightening and global
financial market uncertainty are explained
by expectations of an aggressive FFR hike after the FOMC meeting in June 2018,
coupled with high UST yield volatility. Ubiquitous global uncertainty also
stems from ECB policy to reduce asset purchases, PBoC policy to lower the
reserve requirement, the rising global oil price and deteriorating US-China
trade relations. The uncertainty could feed through to broad USD appreciation
and trigger a capital reversal from developing economies, thereby prompting
broad currency depreciation, including the Rupiah. Such condition requires proper policy response to keep
financial market yield in emerging countries interesting to investors.
Rupiah
exchange rates defied depreciatory pressures in June 2018, which intensified in
the second half of the month as the USD strengthened globally. The rupiah appreciated until the middle of June 2018,
hitting Rp13,853/USD on 6th June, in line with Bank Indonesia’s
pre-emptive, front-loading and ahead-of-the-curve policy response taken at the
end of May 2018. Nevertheless, the more aggressive change in
stance adopted by the Federal
Reserve at the Federal Open Market Committee (FOMC) meeting in the middle of
June, combined with the changing central bank policy response in other
countries, specifically in Europe
and China, as well as global financial market uncertainty, triggered depreciation nearly all global currencies, including the Rupiah. On 28th June 2018, the rupiah stood at
Rp14,390/USD, falling 3.44% (ptp) on the level recorded at the end of May 2018.
Compared with conditions at the end of December 2017, the rupiah has fallen
5.72% (ytd), which is less severe than the depreciation experienced in other
developing economies, such as The
Philippines, India, South Africa, Brazil, and Turkey. Bank Indonesia will remain vigilant of the global
financial market uncertainty, while continuing to stabilise the rupiah in line
with the currency’s fundamental value and maintaining market mechanisms, backed
by financial market deepening efforts.
Inflation
remains under control within the target corridor, supported by stable food
prices and anchored expectations. CPI
inflation accelerated in May 2018 to 0.21% (mtm) from 0.10% (mtm) the month
earlier in line with the onset of Ramadan. Despite accelerating, headline
inflation in May 2018 was lower than the historical average during the holy
fasting month for the past four years. Annually, inflation decelerated to 3.23%
(yoy) in the reporting period from 3.41% (yoy) the month earlier. Controlled
CPI inflation was backed by stable core inflation as a result of policy
consistency from Bank Indonesia to help form rational inflation expectations,
including through exchange rate intervention to ensure the currency’s
fundamental value. In addition, volatile foods (VF) experienced inflation but
at a rate lower than the historical average for Ramadan. Meanwhile, rising
airfares to meet seasonal demand edged up administered prices (AP) in the
reporting period. Bank Indonesia predicts inflation in 2018 to remain under control within
the inflation target of 3.5±1%. Furthermore, policy coordination between Bank
Indonesia and the Government to control inflation is constantly strengthened.
Domestic
demand continued to drive domestic economic growth momentum in the second
quarter of 2018. Rising incomes on
fiscal stimuli and controlled inflation are maintaining household consumption,
coupled with increasing consumer confidence amongst the middle and upper
classes. Solid consumption is reflected in stronger automotive and retail
sales. Meanwhile, investment growth is still resilient, backed by private
building investment and infrastructure projects as well as non-building
investment linked to infrastructure and mining. In addition, increasing cement
and heavy equipment sales also point to strong investment. Solid domestic
demand has stimulated a surge of imports, particularly of capital goods and raw
materials, while export growth remains in positive territory in line with the
global economic recovery. Bank Indonesia predicts national economic growth in
the 5.1-5.5% range in 2018.
Indonesia’s
trade balance recorded a narrower deficit in May 2018, supported by gains in
the non-oil and gas trade balance. The trade deficit stood at USD1.52 billion in May
2018, down from USD1.63 billion the month earlier. The reduction stemmed from a
deeper decline in the non-oil and gas trade deficit than the increase in the
oil and gas trade deficit. The non-oil and gas trade deficit narrowed on
increasing non-oil and gas exports, particularly shipments of electrical
machinery and equipment, metal ore, crust and dust, iron and steel, knitted
garments and lead. On the other hand, non-oil and gas imports also surged to
fuel increasing production and investment activities. Cumulatively from
January-May 2018, the non-oil and gas trade surplus stands at USD2.20 billion.
The position of official reserve assets was recorded at USD122.9 billion in May
2018, equivalent to 7.4 months of imports or 7.2 months of imports and
servicing government external debt, which is well above the international
standard of three months. Bank Indonesia expects the current account deficit to
remain in line with the previous projection, which is comfortably below the 3%
threshold.
The
financial system is stable and the bank intermediation function is improving. A relatively high Capital Adequacy Ratio (CAR) was
reported by the banking industry at 22.1%, with a sound liquidity ratio at
20.3% in April 2018. In addition, the banking industry maintained a low level
of non-performing loans (NPL) at 2.79% (gross) or 1.28% (net) in April 2018.
Financial system stability contributed to the improving the bank intermediation
function. Deposit growth in
April 2018 accelerated to 8.1%
(yoy), from 7.7% (yoy) the previous
month. The banking industry confirmed a bump in credit growth
from 8.5% (yoy) the month earlier to 8.9% (yoy), with the trend expected to
persist. On the other hand, economic financing through the financial markets
increased 15.8% (yoy) in April 2018, dominated by IPOs and rights issues,
corporate bonds, medium-term notes (MTN) and Negotiable Certificates of Deposit
(NCD). Considering the economic gains and progress of corporate sector and
banking industry consolidation, Bank Indonesia projects credit and deposit
growth in 2018 at 10.0-12.0% (yoy) and 9.0-11.0% (yoy) respectively. Several steps are needed to optimize credit growth
through accommodative macroprudential policy.
Jakarta,
29th June 2018
Communication Department
Agusman
Executive Director
