BI Rate Held at 7.50% - Bank Sentral Republik Indonesia
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May 23, 2019

No. 17/ 95 /DKom

The BI Board of Governors agreed on 17th December 2015 to hold the BI Rate at 7.50%, while maintaining the Deposit Facility rate at 5.50% and the Lending Facility rate at 8.00%. Bank Indonesia believes that rooms for monetary easing are open, on the back of preserved macroeconomic stability, specifically end-2015 inflation that is projected to be below 3%, and current account deficit, projected at around 2% of GDP. In the short term, Bank Indonesia will monitor global financial market development post-Federal Funds Rate (FFR) hike as well as conditions of the domestic economy. Additionally, Bank Indonesia will strengthen coordination with the Government to control inflation, stimulate growth and accelerate structural reforms, thereby buoying economic growth while maintaining macroeconomic and financial system stability.

The economic challenges faced in 2015 were linked to global financial and economic dynamics, namely a flagging global economy, tumbling commodity prices and shocks on financial markets. Global economic moderation was the result of fragile economic growth in advanced countries and weaker growth in developing countries. Moderate US growth was bolstered by consumption and improvements in the housing sector but the gains were weighed down by weak exports and limited manufacturing expansion. On the other hand, the economic recovery in Europe was supported by stronger domestic demand but inflation remained low. Conversely, economic moderation in China persisted in line with economic rebalancing from investment driven growth to consumption driven. Moving forward, despite global economic gains, Bank Indonesia will remain vigilant of external risks, particularly economic moderation in China and global financial market conditions post-FFR hike.

In line with weaker global growth, the economy of Indonesia also slowed in 2015. Accordingly, domestic economic growth was projected at 4.8% annually, down from the 5.0% (yoy) achieved in 2014. The slowdown was prompted by sluggish exports on the back of weaker global demand and lower commodity prices. Such conditions were more pronounced in regions reliant on natural resources. In line with the continuosly weak export, limited investment growth was also recorded. Construction growth bucked the downward trend due to the realisation of government infrastructure projects, while non-construction growth was limited. Notwithstanding, robust household and government consumption supported economic growth. In 2016, economic growth in Indonesia is projected in the range of 5.2-5.6% (yoy), bolstered by fiscal stimuli, primarily in the form of infrastructure projects, and tenacious consumption. Meanwhile, investment is expected to increase in line with solid macroeconomic stability and the implementation of government policy packages designed to attract investment. In addition, government measures to boost public purchasing power coupled with effective fiscal stimuli will play a key role in terms of catalysing economic growth in 2016.

The 2015 current account was expected improve from the previous year at around 2% of GDP. Improvements in the non-oil and gas as well as oil and gas trade balances contributed to the smaller current account deficit as imports decreased significantly. This was in line with the considerably weak domestic demand and exports due to lower commodity prices and dwindling global demand. On the other hand, the capital and financial account recorded a surplus despite uncertainty obscuring global financial markets and domestic economic moderation. Nonetheless, the surplus was estimated to be narrower than that of the previous year and was inadequate to fully offset the current account deficit. Consequently, the position of reserve assets stood at USD100.2 billion at the end of November 2015, equivalent to 7.1 months of imports or 6.9 months of imports and servicing public external debt, which is well above the international adequacy standard of around three months.

Depreciatory pressures on the exchange rate have escalated in 2015, triggered by uncertainties in the FFR hike and Yuan depreciation. Through to November 2015, the rupiah depreciated by an average of 11.05% to a level of Rp13,351 per USD. Rupiah depreciation was precipitated by a number of externalities, including uncertainty surrounding the timing and magnitude of the FFR hike, concerns over fiscal negotiations in Greece and Yuan depreciation against a backdrop of economic moderation in China. On the home front, however, pressures on the rupiah stemmed from stronger demand for foreign currency for debt repayments and seasonal dividend payments as well as concerns over domestic economic moderation. Nevertheless, the rupiah appreciated in October and November 2015 and was also more stable in line with positive sentiment regarding emerging market countries due to the dovish announcement relayed at the FOMC and greater optimism concerning the domestic economic outlook as the Government introduced a series of policy packages and Bank Indonesia intervened to stabilise exchange rates. Furthermore, Bank Indonesia will continue to maintain exchange rate stability in line with the currency’s fundamental value, thus supporting macroeconomic stability and economic rebalancing towards stronger and more sustainable growth.

Inflation in 2015 was projected below 3%. Low inflation was supported by volatile foods, deflation of administered prices and controlled core inflation. Volatile food inflation was low due to an abundant supply of foodstuffs. Meanwhile, administered prices were predicted to experience deflation in line with lower global energy prices amidst subsidy reforms. On the other hand, core inflation was controlled as a result of anchored expectations, limited pass-through of exchange rate depreciation and relatively weak demand pressures. Such conditions were also linked to Bank Indonesia’s role in terms of managing domestic demand, maintaining exchange rate stability and anchoring inflation expectations, as well as improved policy coordination with the Government to control inflation. In November 2015, Consumer Price Index (CPI) data recorded inflation of 0.21% (mtm), affecting all components. Consequently, CPI inflation from January-November 2015 was recorded at 2.37% (ytd) or 4.89% (yoy) on an annualised basis. Inflation in 2016 was predicted to remain within the target corridor of 4±1%. Notwithstanding, inflation risks demand continued vigilance, especially adjustments to administered prices, which will require stronger policy coordination between Bank Indonesia and the Government.

Financial system stability remained solid, underpinned by a resilient banking system and relatively stable financial markets. Banking industry resilience endured, with credit, liquidity and market risks well mitigated. In October 2015, the Capital Adequacy Ratio (CAR) remained well above the 8% minimum threshold at 20.8%, while non-performing loans (NPL) were low and stable at 2.7% (gross) or 1.4% (net). In terms of the intermediation function, credit growth was recorded at 10.4% (yoy), lower than that posted in the same period last year, along with the economic slowdown. Deposit growth was recorded at 9.0% (yoy) in October 2015. Looking forward, credit growth is predicted to continue accelerating in the range of 12-14% in 2016 in line with an increase in economic activity and the looser macroprudential policy stance adopted by Bank Indonesia, accompanied by the reduction to the primary reserve requirement.

Jakarta, 17th December 2015
Communication Department

Tirta Segara
Executive Director

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