BI Rate Maintained at 7.50% - Bank Sentral Republik Indonesia
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April 18, 2019

No. 16/56/DKom

It was decided at the Board of Governors’ Meeting, convened on 14th August 2014, to hold the BI rate at a level of 7.50%, with the lending facility and deposit facility rates maintained at 7.50% and 5.75% respectively. Such policy is consistent with efforts to guide inflation towards its target corridor of 4.5±1% in 2014 and 4.0±1% in 2015, as well as reduce the current account deficit to a more sustainable level. Bank Indonesia acknowledges the ongoing economic rebalancing process, underpinned by tenacious macroeconomic stability, as corroborated by moderating domestic demand and falling inflation despite a burgeoning current account deficit in line with seasonal trends during the second quarter of 2014. Looking ahead, there remain a number of external and domestic risk factors that demand vigilance due to their potential to undermine achievement of the inflation target and delay improvements in the current account. To this end, Bank Indonesia will continue to strengthen its monetary and macroprudential policy mix along with policies to bolster the structure of the domestic economy and manage external debt, in particular corporate external debt. Furthermore, Bank Indonesia will also tighten policy coordination with the Government with respect to controlling inflation and reducing the current account deficit in order to ensure economic rebalancing continues unimpeded by maintaining sustainable economic growth moving forward.

Internationally, BI assessments indicate that the global economic recovery continued during the reporting period. Supported by economic momentum in advanced countries as accommodative monetary policy endured and fiscal pressures eased. Revised up GDP figures for the first quarter of 2014 along with sound actual GDP data in the subsequent quarter indicate growing traction in the US recovery as investment, consumption and the external sector expand. Meanwhile, economic growth in developing countries is expected to remain relatively limited, thereby exacerbating the ongoing downward trend in international commodity prices. Economic growth in China picked up during the second quarter of 2014 due to the stimuli introduced. Looking forward, a number of global risks require monitoring, for instance the normalisation policies of the Federal Reserve and Bank of England, as well as the risk of spillover and spillback from sluggish emerging market economies.

Domestically, the economy cooled off during the second quarter of 2014 due to a contraction in exports, specifically natural resource based commodities. The domestic economy expanded by 5.12% (yoy) in the second quarter of 2014, down from the 5.22% (yoy) posted in the preceding quarter as a result of weaker export performance of natural resource based commodities, such as coal, CPO and minerals. Such conditions are evidenced by regional economic performance, with torpid economic conditions in the second quarter stemming from plantations and mines on the islands of Sumatra and Kalimantan. Concerning domestic demand, the economic slowdown is primarily attributable to a contraction in government spending due to the postponement of social assistance disbursements, coupled with sluggish non-construction investment activity. Notwithstanding, dogged household consumption bolstered economic growth in the second quarter of 2014, credited to activities associated with the presidential election as well as maintained public purchasing power in line with lower inflation. Moving forward, economic growth is projected to continue moderating as domestic demand wanes despite stronger export performance. In general for 2014, the domestic economy is expected to expand in line with the previous BI projection of 5.1-5.5%, with a bias towards the lower end of the range.

The Indonesia balance of payments improved in the second quarter of 2014 despite a growing current account deficit. The surplus Indonesia balance of payments was supported by stronger capital and financial account performance. The current account deficit was USD9.1 billion (4.27% of GDP) in the second quarter of 2014, which is down on the deficit reported in the same period of the previous year at USD10.1 billion (4.47% of GDP) in accordance with stabilisation policy instituted by Bank Indonesia and the Government but up dramatically from the USD4.2 billion (2.05% of GDP) reported in the previous quarter in line with seasonal trends. The growing non-oil/gas trade surplus was again insufficient to offset the burgeoning oil and gas trade deficit. Furthermore, exports of commodities such as coal, CPO and minerals experienced a decline in line with moderating economic growth in emerging market countries along with enforcement of the Mineral and Coal Mining (Minerba) Act. Conversely, manufacturing exports such as automotive, textiles and clothing continued to expand as recoveries persisted in advanced countries. Imports of consumer goods and oil remained high in the second quarter of 2014 in line with strong demand in the approach to Ramadan and Eid-ul-Fitr. Meanwhile, servicing external debt and repatriation of dividends/coupons, which increased in line with seasonal trends in the second quarter, aggravated pressures on the current account deficit. In terms of the capital and financial accounts, a larger surplus than that registered in the preceding quarter was reported due to a surge in portfolio investment inflows and FDI in line with the favourable perception of investors regarding the domestic economic outlook. Consequently, foreign exchange reserves in Indonesia swelled to US$110.5 billion, equivalent to 6.4 months of imports or 6.2 months of imports and servicing external debt, which is well above international adequacy standards of around three months. The current account deficit is expected to recover in upcoming quarters as manufacturing exports rebound and exports of minerals recommence, accompanied by a deceleration of non-oil/gas imports.

The rupiah experienced depreciatory pressures but volatility was mitigated. Point to point, in the second quarter of 2014 the rupiah declined by 4.18% (mtm) to a level of Rp11,855 per US dollar, while on average the rupiah appreciated during the reporting period 1.76% to Rp11,629 per US dollar. Strong corporate demand in harmony with seasonal trends that favour servicing external debt and repatriating dividends/coupons placed additional pressures on the rupiah. Additionally, the wait-and-see attitude of investors concerning the results of the presidential election, coupled with external conditions such as geopolitical tensions in Ukraine and the ongoing conflict in Iraq, also affected rupiah performance. In July 2014, the rupiah appreciated on the back of a peaceful and orderly presidential election. On average, the rupiah strengthened 1.8% (mtm) to a level of Rp11,682 per US dollar, compared to 2.4% point-to-point, and closed at a level of Rp11,578 per US dollar. Looking ahead, Bank Indonesia will consistently maintain rupiah exchange rates in accordance with its fundamental value.

Inflation was controlled and continued to follow a downward trend, thereby supporting achievement of the inflation target in 2014, namely 4.5±1%. Headline inflation in the second quarter of 2014 was recorded at 6.70% (yoy), down from 7.32% (yoy) posted in the previous quarter. Controlled inflation endured into July 2014, at a rate of 0.93% (mtm) or 4.53% (yoy), which is relatively low compared to the seasonal average during Ramadhan over the past three years. Lower inflation is credited to less intense inflationary pressures on volatile foods along with controlled core inflation. Inflation of volatile foods eased as supply increased upon the arrival of the harvest season at a number of production centres. Meanwhile, moderating domestic demand, minimal international price pressures and well-anchored inflation expectations helped control core inflation. There remain several risk factors that require vigilance, for instance potential corrections to administered prices such as electricity rates as well as rising food prices.

Solid financial system stability was supported by banking system resilience and relatively well maintained financial market performance during the reporting period. Banking industry resilience was resolute, with credit risk, liquidity risk and market risk all well mitigated and supported by a sound capital base. At the end of the second quarter of 2014, the Capital Adequacy Ratio (CAR) of the banking industry was high at around 19.40%, which is well above of the minimum 8% threshold. In addition, non-performing loans (NPL) were low and stable at around 2.00%. Credit growth to the private sector decelerated to 16.6% (yoy) from 19.1% (yoy) in the previous quarter in line with the ongoing economic rebalancing process. Sound liquidity conditions in the economy and banking industry were maintained during the reporting period, as reflected by growth of M2 and deposits that expanded 13.1% (yoy) and 13.6% (yoy) respectively, accompanied by relatively stable interest rates on the money market. Tight liquidity was experienced at several banks, especially those pursuing aggressive expansion strategies and due to internal conditions, which helped drive healthy competition for funds and raised bank interest rates. Meanwhile, the capital market performed well during the second quarter and July of 2014, substantiated by gains in the JSX Composite. Bank Indonesia will continue to coordinate with the Financial Services Authority (OJK) to maintain future financial system stability, thereby supporting more balanced and sustainable economic growth.

Jakarta, 14th August 2014
Communication Department

Tirta Segara
Executive Director

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