Macroeconomic Stability Maintained, BI Rate Lowered 25bps to 6.50%, BI 7-Day (Reverse) Repo Rate also reduced 25bps to 5.25% - Bank Sentral Republik Indonesia
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August 21, 2019

No. 18/50/DKom

The BI Board of Governors agreed on 15-16th June 2016 to lower the BI Rate 25bps to 6.50%, while also cutting the Deposit Facility (DF) and Lending Facility (LF) rates 25bps to 4.50% and 7.00% respectively, effective June 17th 2016. Bank Indonesia also announced a 25bps reduction to the BI 7-Day (Reverse) Repo Rate from 5.50% to 5.25%, along with plans to reformulate the policy rate as announced on April 15th 2016. Consequently, the term structure of monetary operations is as follows:

RDG_Juni16en.png

Bank Indonesia will ease macroprudential policy while maintaining compliance to prudential principles1 by: (i) relaxing the loan-to-value ratio (LTV) and financing-to-value ratio (FTV) on housing loans/financing as attached; and (ii) relaxing partially prepaid loans/financing pursuant to regulations concerning phased loan/financing in line with the construction progress of the associated property up to the second loan/financing facility. Furthermore, to boost banking credit Bank Indonesia will also raise the floor on the Reserve Requirement - Loan to Funding Ratio (RR-LFR) from 78% to 80%, with the ceiling maintained at 92%. The new macroprudential policies will take effect in August 2016.

The adopted policy mix is congruent with the assessment of the BI Board of Governors that macroeconomic stability has been maintained, reflecting low inflation, a narrower current account deficit and relatively stable exchange rates. The new policy mix is expected to bolster efforts to stimulate domestic demand in order to drive domestic economic growth momentum, while maintaining macroeconomic stability, amid weak global economy. Bank Indonesia believes that the monetary and macroprudential policy easing will strengthen Government’s policy to increase sustainable economic growth through strengthening growth stimuli and accelerating structural reforms.

The uneven and sluggish global economic recovery persisted, while uncertainty on global financial markets subsided. Despite US consumption and inflation indicators tracking an upward trend, the US recovery is not yet solid with non-residential investment still weak, lingering labour market concerns and expectations of lower inflation moving forward. Consequently, the Federal Reserve remained dovish in terms of further hikes to the Federal Funds Rate (FFR). On the other hand, the recovery in Europe was considered moderate and overshadowed by the Brexit that could reignite pressures on global financial markets. Japan’s economy remained weak, with declining exports, stagnant consumption and increasing deflation. Such conditions forced many advanced countries to continue accommodative monetary policy. Meanwhile, the economic recovery in China was again under threat as investment slowed, along with production and consumption. On commodity markets, the global oil price began to rise but is not expected to reach previous levels due to abundant supply and weak demand. The prices of several export commodities from Indonesia improved, particularly crude palm oil (CPO).

At home, domestic economic growth was observed to improve in the second quarter of 2016, albeit not as strong as previously predicted. Household consumption was noted to increase as retail sales surged during the approach the Eid-ul-Fitr and annual bonuses were disbursed. Despite a further surge in government capital spending, investment, especially non-construction investment, showed no significant signs of growth. Concerning the external sector, limited export growth was recorded with exports of several commodities beginning to pick up. Bank Indonesia perceives the need for additional measures to stimulate domestic demand and, therefore, strengthen economic growth momentum. Consequently, domestic economic growth is projected to be in the range of 5.0-5.4% (yoy) in 2016.

Indonesia’s trade balance recorded a surplus in May 2016, primarily supported by a non-oil and gas trade surplus. The trade surplus stood at USD0.38 billion, lower than USD0.66 billion the month earlier. A seasonal increase in oil imports during the run up to Ramadan and Eid-ul-Fitr contributed to the lower trade surplus. The trade surplus was still in line with the projected current account deficit in the second quarter of 2016. On the other hand, USD4.5 billion of foreign capital flowed onto financial markets in Indonesia through to May 2016. Foreign capital inflows surged at the beginning of June 2016, after a net capital outflow was recorded in the previous period. Consequently, the positon of official reserve assets at the end of May 2016 was recorded at USD103.6 billion, equivalent to 7.9 months of imports or 7.6 months of imports and servicing public external debt, which is well above international adequacy standards of three months.

The rupiah strengthened in June 2016, after depreciating the month earlier as risk accumulated on global financial markets due to the expected FFR hike. On average, the Rupiah depreciated 1.95% (mtm) to a level of Rp13,434 per USD in May 2016. Depreciatory pressures, which were also felt in other countries, were triggered by global risks associated with the proposed FFR hike. The Rupiah rebounded at the beginning of June 2016, however, as foreign capital flowed back into Indonesia after weaker-than-expected labour data was announced in the United States. The Federal Reserve’s decision to postpone the FFR hike at the FOMC on 15th June 2016 should help stabilise the Rupiah. Looking forward, Bank Indonesia will continue to maintain exchange rate stability in line with the rupiah’s fundamental value.

Inflation was controlled in May 2016 and is projected within the target corridor for 2016 at 4±1%. Inflation in May 2016 was recorded at 0.24% (mtm) or 3.33% (yoy), which is relatively low compared to the average in the approach to Ramadan for the past five years. Volatile foods and administered prices contributed to higher inflation during the reporting period. Volatile foods were affected by rising food prices as demand spiked before Ramadan. Meanwhile, administered prices climbed on rising airfares. On the other hand, core inflation was controlled at 0.23% (mtm) or 3.41% (yoy) in line with anchored expectations and sluggish domestic demand. Facing the holy fasting month of Ramadan and Eid-ul-Fitr, several government policies combined with tight coordination between Bank Indonesia and the Government are expected to control inflationary pressures, thereby ensuring inflation during Ramadan this year will be lower than that recorded during Ramadan in previous years. Consequently, inflation at the end of 2016 is projected around the midpoint of the target.

Financial system was stable, with a resilient banking system. In April 2016, the Capital Adequacy Ratio (CAR) stood at 21.7%, while the ratio of non-performing loans (NPL) was recorded at 2.9% (gross) and 1.5% (net). Looser monetary policy was transmitted through the interest rate channel, as reflected by lower deposit and lending rates in the banking industry. In contrast, monetary policy transmission through the credit channel was not optimal. The Federal Reserve’s decision to postpone the FFR hike at the FOMC on 15th June 2016 should help stabilise the rupiah. Credit growth continued to decelerate from 8.7% (yoy) in March 2016 to 8.0% (yoy) in April 2016. Similarly, deposit growth slowed to 6.2% (yoy) in April 2016 from 6.4% (yoy) the month earlier. Bank Indonesia considers the need for looser policy to catalyse credit growth on both the supply and demand sides in order to bolster future economic growth.

Jakarta, June 16th 2016
COMMUNICATION DEPARTEMENT

Tirta Segara
Executive Director

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1 The regulation is only applicable to banks with a gross NPL ratio on housing loans below 5% and total gross non-performing loans (NPL) below 5%.
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