BI 7-Day Reverse Repo Rate Held at 6,00%, Rupiah Reserve Requirement Lowered by 50bps: Maintaining External Stability, Stimulating Economic Growth - Bank Sentral Republik Indonesia
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October 20, 2019

No.21/46/DKom 

The BI Board of Governors agreed on 19th and 20th June 2019 to hold the BI 7-Day Reverse Repo Rate at 6.00%, while also maintaining the Deposit Facility (DF) and Lending Facility (LF) rates at 5.25% and 6.75%, respectively. Seeking to ensure adequate liquidity in the banking industry in order to finance economic activity, Bank Indonesia has decided to lower the rupiah reserve requirement for conventional and Islamic banks by 50bps to 6.0% and 4.5% respectively, with the average reserve requirements remaining at 3.0%, effective from 1st July 2019. Bank Indonesia constantly monitors global financial market dynamics and the external stability of the national economy when considering reductions to the policy rate in line with low inflation and the current need to stimulate domestic economic growth. Bank Indonesia will continue to orient the monetary operations strategy towards ensuring adequate liquidity is available in the money market. Furthermore, Bank Indonesia will maintain an accommodative macroprudential policy stance to catalyse bank lending and expand economic financing. In addition, Bank Indonesia will bolster payment system policy and financial market deepening efforts to support economic growth, while strengthening coordination with the Government and other relevant authorities to sustain economic stability, stimulate domestic demand, increase exports and tourism as well as attract foreign capital flows.

The recent escalation of trade tensions is impacting global economic dynamics. Deteriorating trade relations are eroding world trade volume and stifling economic growth in a number of jurisdictions. Softer growth is projected in the United States due to declining exports, the fading effect of fiscal stimuli and retreating economic confidence. Growth has also slowed in Europe as a result of sluggish exports coupled with the ongoing structural issue of an ageing population. Growth is moderating in China and India due to weaker external sectors as well as flatter consumption and investment growth. Global economic moderation has compelled several central banks to adopt a looser monetary policy stance. In addition to the impact on growth, escalating trade tensions have triggered increasing uncertainty in the global financial markets, leading to a reversal of capital flows from developing to advanced economies (flight to quality). Recent global economic developments are challenging efforts to stimulate economic growth and maintain foreign capital flows.

At home, a general softening of national economic growth has occurred during the second quarter of 2019 as a corollary of declining export performance. The recent escalation of international trade tensions has undermined export performance in Indonesia due to restrained global demand and lower commodity prices despite relative improvements for a number of commodities, including chemicals, iron and steel, coal as well as vegetable oil. Non-building investment has thus far failed to increase significantly as a consequence of flagging exports notwithstanding positive building investment growth. Meanwhile, consumption is expected to pick up on the back of maintained public purchasing power and consumer confidence. Limited domestic demand gains have fed through to lower imports. Moving forward, efforts to stimulate domestic demand shall be increased in order to mitigate the adverse impact of global economic moderation stemming from international trade tensions. For the year, Bank Indonesia therefore projects national economic growth below the midpoint of the 5.0-5.4% range in 2019. Therefore, Bank Indonesia will institute an optimal policy mix in conjunction with the Government and other relevant authorities in order to build national economic growth momentum.

Indonesia is expected to maintain a positive Balance of Payments (BOP) in the second quarter of 2019, thus reinforcing external resilience. The capital and financial account surplus may potentially exceed the previous projection despite the seasonal increase anticipated in the current account deficit. The capital and financial account surplus is supported by maintained flows of foreign direct investment (FDI) and portfolio investment in line with the promising national economic outlook together with highly attractive domestic financial assets. Meanwhile, Bank Indonesia predicts a widening of the current account deficit due to slower export growth for goods and services along with the need to repatriate dividend payments as well as service the cyclical increase in external debt. At the end of May 2019, the position of reserve assets was recorded at USD120.3 billion, equivalent to 6.9 months of imports or 6.7 months of imports and servicing government external debt, which is well above the international standard of three months. Bank Indonesia projects a narrower current account deficit in 2019 compared with conditions in 2018, namely in the 2.5-3.0% of GDP range. Furthermore, Bank Indonesia will strengthen policy synergy with the Government and other relevant authorities to strengthen external resilience.

In general, rupiah exchange rate stability has been maintained. In May 2019, the rupiah depreciated 0.18% (ptp) compared with the position recorded at the end of April 2019. The latest developments are linked to the recent furtherance of international trade tensions, which triggered risk-off sentiment in the global financial markets. The rupiah regained momentum in June 2019, however, appreciating 0.04% (ptp) as of 19th June 2019 compared with the rate recorded at the end of May 2019, or by an average of 0.69% compared with the May 2019 average. The rupiah strengthened in June 2019 on the back of a solid domestic economic outlook, including the recent improvement in Indonesia’s sovereign rating affirmed by Standard & Poor’s (S&P), in addition to a global loosening of monetary policy. Such dynamics are expected to attract foreign capital flows back to Indonesia and appreciate the value of the rupiah. Moving forward, Bank Indonesia expects to maintain rupiah exchange rate stability in line with market mechanisms. Meanwhile, to enhance the effectiveness of exchange rate policy and reinforce domestic financing, Bank Indonesia will continue to accelerate financial market deepening, targeting the money market and foreign exchange market in particular.

Inflation was kept under control in May 2019, which coincided with the holy fasting month of Ramadan and the approach to Eid-ul-Fitr.  Consumer Price Index (CPI) inflation increased from 0.44% (mtm) or 2.83% (yoy) in April 2019 to 0.68% (mtm) or 3.32% (yoy) in May 2019. In general, headline inflation was kept under control and below seasonal trends for Ramadan and the approach to Eid-ul-Fitr, averaging 0.77% over the past five years. Inflationary pressures on volatile foods (VF) stemmed from rising prices of chillies, chicken meat and garlic. Congruently, inflationary pressures on administered prices (AP) also increased in line with seasonal trends, induced by intercity transport fares, airfares and railway fares. Meanwhile, core inflation remained under control despite a build-up of price pressures on foods. Moving forward, Bank Indonesia will consistently maintain price stability and strengthen coordination with the Central and Local Governments to ensure low and stable inflation, which is projected below the midpoint of the target corridor for 2019, namely 3.5±1%.

Financial system stability has been maintained amidst a solid intermediation function and contained credit risk. The Capital Adequacy Ratio (CAR) of the banking industry remained high at 23.1% in April 2019, accompanied by a low level of Non-Performing Loans (NPL) at 2.6% (gross) or 1.2% (nett). In terms of the intermediation function, the banking industry reported growth of outstanding loans in the reporting period at 11.1% (yoy), lower than March 2019 at 11.5% (yoy). In addition, deposit growth reported by the banking industry decelerated to 6.6% in April 2019 from 7.2% in March 2019. Meanwhile, liquidity in the banking industry has been adequately maintained, as reflected by a ratio of liquid assets to deposits of 20.2% in April 2019, despite early indications of a slight decline in May 2019. The performance of public listed corporations remains sound, backed by maintained repayment capacity. Looking ahead, Bank Indonesia perceives adequate space to expand credit growth without disrupting financial system stability considering the credit cycle remains suboptimal with potentially faster credit growth facilitated by accommodative macroprudential policy. Therefore, Bank Indonesia projects growth of loans disbursed by the banking industry in the 10-12% (yoy) range, supported by deposit growth forecasted in the 8-10% (yoy) range.

The payment systems, both cash and noncash, remain uninterrupted. In terms of cash payments, the position of currency in circulation grew 19.3% (yoy) to total Rp850.2 trillion in the reporting period in line with the seasonal spike in demand for currency during Ramadan/Eid-ul-Fitr 2019. Non-cash payments, namely ATM/debit cards, credit cards and e-money, expanded by 12.6% (yoy), with e-money accelerating significantly to 218.3% (yoy) due to increasing use of nonbank e-money for e-commerce. Moreover, Bank Indonesia continues to expand its electronification program for the social aid program (bansos), transportation modes and local government transactions in order to enhance efficiency and boost economic growth. In addition, Bank Indonesia will continue to advocate digital transformation of the national economy through implementation of the New Vision for Indonesia’s Payment System towards 2025. Bank Indonesia will also expand its program to improve the quality of micro, small and medium enterprises (MSME) in order to produce quality products, participate in the digital transformation of the national economy through e-commerce, digital payments and digital financing in particular, and expand access to exports for MSMEs. Jakarta,

June 20th 2019
Communication Department


Onny Widjanarko
Executive Director

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