BI 7-Day Reverse Repo Rate Lowered 25 bps to 4,75%: Strengthening Stability, Promoting Growth Momentum - Bank Sentral Republik Indonesia
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April 06, 2020

No. 22/13/DKom
The BI Board of Governors agreed on 19th and 20th February 2019 to lower the BI 7-day Reverse Repo Rate by 25 bps to 4,75%, Deposit Facility (DF) rates lowered 25 bps to 4,00% and Lending Facility (LF) rates lowered 25 bps to 5,50%. Monetary policy remains accommodative and is consistent with controlled inflation in the target corridor, maintained external stability as well as pre-emptive measures to maintain domestic economic growth momentum in the face of a global economic recovery potentially restrained by the recent Covid-19 outbreak. Furthermore, Bank Indonesia will continue to orient monetary operations towards maintaining adequate liquidity and supporting the transmission of an accommodative policy mix. Meanwhile, Bank Indonesia will maintain accommodative macroprudential policy to stimulate economic financing with respect to the suboptimal financial cycle, while also adhering to prudential principles. To that end, Bank Indonesia will adjust the calculation of the Macroprudential Intermediation Ratio (MIR) by expanding the funding and financing purview for foreign bank branches towards further national economic advancement. In addition, Bank Indonesia will continue to strengthen payment system policy towards fostering economic growth through the expansion of QRIS (Quick Response Code Indonesian Standard) acceptance and electronification of social aid program (bansos) disbursements and local government financial transactions. Moving forward, Bank Indonesia will monitor global and domestic economic developments in order to fully utilise the room available to implement an accommodative policy mix to maintain controlled inflation and external stability as well as to support economic growth momentum. Moreover, Bank Indonesia will continue to strengthen coordination with the Government and other relevant authorities to maintain economic stability and catalyse domestic demand, while accelerating structural reforms and implementing efforts to mitigate the impact of Covid-19.

The global economic recovery process has been hampered by the Covid-19 (coronavirus disease 2019) outbreak since the end of January 2020. Nevertheless, the Phase 1 Trade Deal agreed between the United States and China has helped to ease global uncertainty and stoke economic optimism concerning the global economic recovery outlook. The latest reading on a number of global economic indicators, such as consumer confidence, Purchasing Managers Index (PMI) and export orders, recorded gains from December 2019-January 2020. Optimism has been eroded, however, by the Covid-19 outbreak, which is expected to subdue economic performance in China and impede the global economic recovery process, at least during the first quarter of 2020. Bank Indonesia has revised down its global economic growth projection for 2020 from 3.1% to 3.0% before accelerating to 3.4% in 2021, up from the 3.2% projected previously for 2021. Covid-19 has rattled global financial markets, increasing risk and triggering a reversal of global flows from developing countries to safe-haven assets and commodities, which has intensified currency risk in emerging market countries. Moving forward, efforts to contain Covid-19 demand vigilance due to the potential impact on economic growth, trade volume and international commodity prices as well as capital flows to and from developing countries, including Indonesia.

Efforts are required to stimulate national economic growth and ensure economic resilience in the face of a potentially restrained global economic recovery. In 2019, national economic growth was solid at 5.02% despite declining from 5.17% in 2018. Solid domestic demand remains a key driver of economic growth, while exports languish on compressed global demand and sliding commodity prices. Regionally, solid domestic demand is supported by increasing inter-regional trade, such as in Sumatra. In addition, economic growth in Kalimantan and Bali-Nusa Tenggara has been maintained as exports of primary commodities improve. Moving forward, Bank Indonesia projects lower economic growth in 2020 at 5.0-5.4%, downgraded from 5.1-5.5%, before accelerating in 2021 to 5.2-5.6%. Bank Indonesia has revised down its projection for 2020 due to the potentially muted global economic recovery in light of the recent Covid-19 outbreak, which will impact Indonesia's economy through the tourism, trade and investment channels. Nonetheless, Bank Indonesia will continue to strengthen coordination with the government and other relevant authorities to strengthen the sources, structure and speed of economic growth, while attracting investment through infrastructure projects and implementation of the Omnibus Bill on Job Creation and Taxation.

Indonesia's balance of payments has continued gaining strength, thereby bolstering external resilience. For 2019 as a whole, the overall balance of payments recorded a USD4.7 billion surplus after experiencing a USD7.1 billion deficit in 2018. The gain comes amidst a significant capital and financial account surplus in line with maintained national economic performance, highly attractive financial markets and less global financial market uncertainty. Furthermore, the current account deficit has also declined from 2.94% of GDP in 2018 to just 2.72% of GDP in 2019. The latest reading in January 2020 points to a net inflow of foreign capital to the domestic financial markets totalling USD6.3 billion. At the beginning of February 2020, however, foreign capital inflows, portfolio investment in particular, experienced a correction in response to the Covid-19 outbreak. Meanwhile, the trade balance recorded a USD0.86 billion deficit in the reporting period in line with sluggish exports due to global economic headwinds. The position of reserve assets at the end of January 2020 stood at USD131.7 billion, equivalent to 7.8 months of imports or 7.5 months of imports and servicing government external debt, which is well above the international adequacy standard of around three months of imports. Moving forward, Bank Indonesia will constantly strengthen coordination with the government in order to bolster external sector resilience, including attracting foreign direct investment, and controlling the current account deficit, which is projected in the 2.5-3.0% of GDP range in 2020 and 2021.

The rupiah exchange rate remains stable and consistent with the currency's fundamental value, underpinned by a robust balance of payments. As of 19th February 2020, the rupiah had strengthened by an average of 0.27% compared to the January 2020 level, despite depreciating 0.24% (ptp) on the level recorded at the end of January 2020. A softer rupiah at the beginning of February 2020 was triggered by negative sentiment surrounding Covid-19, before quickly stabilising due to the foreign exchange supplied by exporters as well as maintained foreign capital inflows. The rupiah appreciated in January 2020 by an average of 2.13% compared with the December 2019 average level. Looking forward, Bank Indonesia predicts rupiah stability in line with the currency's fundamental value and maintained market mechanisms. Furthermore, Bank Indonesia will continue to accelerate financial market deepening, targeting the money market and foreign exchange market in particular, in order to support exchange rate policy effectiveness and strengthen domestic financing.

Low and stable inflation was maintained in 2019, thus supporting economic stability. CPI inflation in January 2020 stood at 0.39% (mtm) or 2.68% (yoy), influenced by controlled core inflation, administered prices (AP) deflation and a slight build-up of inflationary pressures on volatile foods (VF). Core inflation has remained under control in line with policy consistency by Bank Indonesia to anchor rational inflation expectations, including maintaining rupiah exchange rates in line with the currency's fundamental value. Administered prices experienced deflationary pressures in the reporting period due to lower special fuel prices and the normalisation of airfares after the recent spike in response to high demand during the festive period. In contrast, VF inflation intensified due, amongst others, to disruptions affecting the production and distribution of various volatile foods, triggered by widespread flooding in various regions. Moving forward, Bank Indonesia will consistently maintain price stability and strengthen policy coordination with the central and local governments in order to maintain low and stable inflation within the target corridor for 2020 and 2021, namely 3.0%±1%.

Effective transmission of the accommodative monetary policy stance has been strengthened by adequate liquidity in the banking industry. Liquidity in the money market and banking industry remains adequate, as reflected by a high average daily transaction volume in the interbank money market during January 2020 at Rp15.12 trillion, together with a high ratio of liquid assets to deposits of 20.86% recorded in December 2019. Monetary policy transmission through the interest rate channel to the money market remains effective, as reflected by a further 103bps decline in the overnight interbank rate to 4.81% and a 119bps decrease in the 1-week JIBOR to a level of 5.05% since the end of June 2019, before Bank Indonesia initiated policy rate reductions in July 2019. In addition, transmission of lower interest rates to the banking industry continues, with the weighted average deposit rate recorded at 6.22% in January 2020, falling 61bps since the end of June 2019. On the other hand, lending rates have come down 29bps to 10.13% in the same period. Meanwhile, growth of narrow money (M1) and broad money (M2) in December 2019 followed the current economic growth trend at 7.43% (yoy) and 6.54% (yoy) respectively. Bank Indonesia will continue to ensure adequate liquidity and enhance money market efficiency, while strengthening transmission of the accommodative policy mix.

Financial system stability has been maintained despite the bank intermediation function still demanding attention. Financial system stability was reflected by a high Capital Adequacy Ratio (CAR) of 23.31% in December 2019 coupled with a low level of non-performing loans (NPL) at 2.53% (gross) or 1.18% (nett). Meanwhile, credit growth remains sluggish, decelerating from 7.05% (yoy) in November 2019 to 6.08% (yoy) in December 2019. Furthermore, deposit growth is also suboptimal, declining from 6.72% (yoy) in November 2019 to 6.54% (yoy) in December 2019. Moving forward, Bank Indonesia will continue to stimulate the bank intermediation function in order to underpin economic growth momentum. Bank Indonesia projects growth of outstanding loans disbursed by the banking industry in 2020 in the 9-11% range, revised down from 10-12% previously in line with the downgraded projection for economic growth in 2020. On the other hand, Bank Indonesia projects deposit growth in 2020 and 2021 in the 8-10% range. Bank Indonesia will maintain an accommodative macroprudential policy stance and strengthen coordination with other relevant authorities in order to maintain financial system stability and catalyse the bank intermediation function.

Payment system availability, both cash and non-cash, remains uninterrupted. The position of currency in circulation grew 6.61% (yoy) in January 2020, while non-cash payment transactions using ATM/debit cards, credit cards and electronic money declined 0.76% (yoy) over the same period, dominated by ATM/debit cards with a 93.16% share. Vibrant growth of e-money transactions was maintained in January 2020 at 172.85% (yoy), evidencing greater public uptake of digital currency. Bank Indonesia continuously strengthens payment system policy to support national economic growth momentum through digital economic and financial transformation. Bank Indonesia is planning to organise National QRIS Week 2020 throughout all provinces of the archipelago in order to expand QRIS acceptance. Furthermore, coordination with the government will be strengthened to accelerate transaction electronification, social aid program (bansos) disbursements and local government financial transactions in particular. Moving forward, Bank Indonesia will continue to maintain the continuity of a fast, simple, affordable, secure and reliable payment system, supported by integrated supervision and strong consumer protection.

Jakarta, 20th February 2020

Onny Widjanarko
Executive Director



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