BI Rate held at 6.75% - Bank Sentral Republik Indonesia
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May 24, 2019

No. 18/ 31 /DKom

The BI Board of Governors agreed on 20-21st April 2016 to hold the BI Rate at 6.75%, while maintaining the Deposit Facility and Lending Facility rates at 4.75% and 7.25% respectively. BI Rate is equivalent to the 12 months monetary operations instrument. In line with the plan to reformulate its policy rate, as announced on April 15th 2016, BI also announced the BI 7-Day (Reverse) Repo rate, which was also maintained at 5.5%. With that, Bank Indonesia’s term structure of monetary operations are:

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The decision is consistent with efforts to stay within the inflation target throughout 2016 at 4±1%, while preserving domestic economic momentum against a backdrop of global economic moderation. Bank Indonesia will continue efforts to strengthen monetary operations framework through a consistent implementation of the term structure of monetary operations. Furthermore, Bank Indonesia will continue to strengthen policy coordination with the Government to control inflation, catalyse growth and accelerate structural reforms, thereby supporting sustainable economic growth moving forward.

The protracted global economic slump has perpetuated loose monetary policy in a number of advanced countries. Global growth has been revised down from previous projections due to sluggish recoveries in several advanced countries combined with economic moderation in developing countries. The recovery in Europe remains weak, with deflation reported in line with downbeat consumers and investors, which forced the European Central Bank (ECB) to extend loose monetary policy, culminating in a negative policy rate. The Bank of Japan (BOJ) also continued to apply a negative policy rate along with several other advanced countries in response to the ongoing economic downshift observed. The loose monetary policy stance adopted in advanced countries is expected to increase global liquidity and spur a further deluge of foreign capital inflows to developing countries. The US economic recovery remains weak, as reflected by slow manufacture and weak export. Consequently, the next Federal Funds Rate (FFR) hike is not expected until the second half of 2016 and of a lesser magnitude. China’s economy is showing early indications of greater stability but the risks continue to linger. On commodity markets, the oil price is expected to continue sliding due to high supply despite weak demand. In contrast, however, the prices of several export commodities from Indonesia are predicted to rebound, in particular crude palm oil (CPO), rubber and lead.

Domestic economic growth was projected to accelerate in the first quarter of 2016 with the momentum maintained into the second quarter on the back of more fiscal stimuli. Government consumption and investment were expected to drive the economy in Q1/2016, as public capital spending and procurement increased significantly due to the implementation of various infrastructure projects. Private investment is also expected to improve on Q2-2016. Additionally, automotive sales climbed into positive territory and consumer confidence surged, indicating solid household consumption. Export performance of several commodities are beginning to improve, especially textile, electrical apparels, and passenger cars. In general, Bank Indonesia predicts economic growth to accelerate in the second quarter of 2016 on the back of increased consumption and investment.

The trade balance recorded a surplus in March 2016, supported by a non-oil and gas trade surplus. Accordingly, the trade surplus of Indonesia stood at USD0.49 billion in the reporting period, down from USD1.14 billion the month earlier. An increase in non-oil and gas imports that exceeded the increase in non-oil and gas exports eroded the surplus. In contrast, the oil and gas trade balance recorded a larger deficit than last month. Notwithstanding, the first quarter trade surplus was consistent with the projected current account deficit in the same period. Foreign capital flowed on to financial markets in Indonesia through to March 2016, totalling USD3.7 billion and primarily targeting SUN instruments. Foreign investors continued to buy domestic stocks in March as the national economic outlook improved. Consequently, the position of official reserve assets at the end of March 2016 stood at USD107.5 billion, equivalent to 8.0 months of imports or 7.8 months of imports and servicing public external debt, which is well above international adequacy standards of three months.

The rupiah appreciated due to the maintained inflow of foreign capital coupled with an increase in the supply of domestic corporate foreign exchange. In March 2016, the rupiah appreciated 3.96% (ytd) to close at a level of Rp13,260 per USD. On the home front, investor perception of a promising domestic economic outlook, stemming from a reduction to the BI Rate and government policy packages aimed at improving the investment climate along with the accelerated implementation of infrastructure projects, helped to drive rupiah appreciation. Externally, less intense risks on global financial markets in line with the dovish statement relayed by the Federal Reserve coupled with a continually loose monetary policy in several advanced countries supported the strong rupiah. Bank Indonesia will continue to maintain exchange rate stability in line with the rupiah’s fundamental value.

Low inflation was observed in March 2016, thus supporting attainment of the 2016 inflation target, namely 4±1%. The Consumer Price Index (CPI) recorded inflation of 0.19% (mtm) or 4.45% (yoy), stemming predominantly from volatile foods due to supply disruptions. On the other hand, administered prices experienced deflation after reductions to electricity rates, airfares and nonsubsidised fuel prices. A relatively low core inflation was also reported at just 0.21% (mtm) or 3.50% (yoy) due to anchored expectations and limited increases in terms of domestic demand. The decrease in fuel and transportation tariff has further alleviated inflationary pressures. Accordingly, Bank Indonesia projects inflation to stay within the target corridor in 2016, namely 4±1%. Furthermore, policy coordination between Bank Indonesia and the Government will be strengthened to control inflation in anticipation of potential inflationary pressures on volatile foods.

Financial system stability was maintained, underpinned by a resilient banking system and relatively sounder financial markets. In February 2016, the Capital Adequacy Ratio (CAR) stood at 21.7%, while non-performing loans (NPL) were recorded at 2.9% (gross) or 1.5% (net). In terms of the intermediation function, credit growth was noted to decelerate from 9.6% (yoy) the month earlier to 8.2% (yoy). In contrast, deposit growth was relatively steady, from 6.8% (yoy) last month to 6.9% (yoy). On the other hand, the looser monetary policy, in the form of a lower BI Rate and primary reserve requirement, has transmitted to increased liquidity and lower bank interest rates. This is expected to enhance the effectiveness of monetary policy in enhancing credit growth.

Jakarta, 21th April 2016
Communication Departement

Tirta Segara
Executive Director

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