BI 7-day Reverse Repo Rate held at 5,25% - Bank Sentral Republik Indonesia
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May 25, 2019

No.18/67/DKom

The BI Board of Governors agreed on 18-19th August 2016 to hold the BI 7-Day Reverse Repo Rate (BI 7-Day RR Rate) at 5.25%, with the Deposit Facility rate held at 4.50%, while lowering the Lending Facility 100 bps to 6.00%. As announced on 15th April 2016, to improve monetary transmission effectiveness, the BI Board of Governors formally published the BI 7-Day RR Rate at the August meeting as the new policy rate to replace the existing BI Rate, effective today.1  In addition, Bank Indonesia will also keep a more symmetrical and narrow interest rate corridor, the lower ceiling (DF) and upper ceiling (LF), at each 75 bps below and above the BI 7-Day RR Rate.

The policy is in line with efforts to maintain macroeconomic stability, by keeping domestic economic growth momentum amid a sluggish against a backdrop of the ongoing global economic slowdown. Bank Indonesia believes that by maintaining macroeconomic stability, especially a controlled inflation within the target range, an improved current account deficit, and relatively stable exchange rate, rooms for monetary easing remains open.

Bank Indonesia will observe short term domestic economic conditions and global economic developments, especially possible Fed Fund Rate hike. In addition, Bank Indonesia will constantly strengthen policy coordination with the Government in order to catalyse sustainable economic growth by accelerating structural reforms. Furthermore, Bank Indonesia will also continue to coordinate with the Government to prepare anticipative policy measures that ensure implementation of the Tax Amnesty will go smoothly and support government’s fiscal adjustment efforts.

The sluggish global economic growth is expected to remain. Despite improving on the back of increased consumption and improvements in the labor sector, the US economy in Q2 grew below projections due to weak investment data. In addition, the US economy remains beset with uncertainty, with the FFR hike expected only once in 2016. Meanwhile, moderate economic growth is forecasted in Europe, overshadowed by the Brexit. Moderate economic growth in China is expected because public investment has thus far failed to stimulate an indebted private sector that is at overcapacity. On the other hand, in the commodity markets, the global oil price, while remain low, shows early indications of a rebound. Nonetheless, the prices of several salient export commodities from Indonesia are starting to improve, including CPO, coal and tin.

The domestic economic growth accelerated in the second quarter of 2016 but remains uneven regionally and by sector. Economic growth in the reporting period was recorded at 5.18% (yoy), up from 4.91% (yoy) last quarter. Economic momentum was boosted by growing domestic demand in the form of government consumption and investment, as well as household consumption. Fiscal stimuli and the looser monetary policy stance have begun to show early signs of stimulating private and public consumption. Regionally, growth on the islands of Java and Sumatra drove the national economy, while conditions in Kalimantan and Eastern Indonesia remained sluggish. By sector, economic gains were supported by the financial services and agricultural sectors. Moving forward, however, Bank Indonesia predicts sustainable economic growth based on the looser monetary and macroprudential policy mix applied, coupled with the government’s policy packages. In contrast, a government less inclined to spend in the second half of the year could potentially undermine growth this year. Consequently, Bank Indonesia predicts economic growth in 2016 in the range of 4.9-5.3% (yoy), slightly down on the previous projection of 5.0-5.4% (yoy).

The balance of payments (BOP) recorded a surplus in the second quarter of 2016, supported by a narrower current account deficit and expanding capital and financial account surplus. The BOP surplus stood at USD2.2 billion, reversing the previous deficit of USD0.3 billion, which is indicative of an increasingly sound external balance, underpinned by maintained macroeconomic stability. The current account deficit was noted to narrow from USD4.8 billion (2.2% of GDP) in Q1 to USD4.7 billion (2.0% of GDP) in Q2-2016, on a growing non-oil and gas trade surplus due to a surge in non-oil and gas exports that surpassed the corresponding increase in imports. Manufacturing exports bolstered non-oil and gas export performance. On the other hand, Indonesia’s trade balance recorded a surplus of USD0.60 billion in July 2016, while the capital and financial account surplus swelled to USD7.4 billion in the second quarter of 2016, supported by positive sentiment regarding the domestic economic outlook along with less uncertain global financial markets. Such conditions were also buoyed by an influx of portfolio investment. Consequently, the position of official reserve assets at the end of July 2016 was recorded at USD111.4 billion, equivalent to 8.5 months of imports or 8.2 months of imports and servicing public external debt, which is well above the international adequacy standard of three months.

Rupiah appreciation continued in line with the promising domestic economic outlook and easing external risks. In the second quarter of 2016, the rupiah appreciated by an average of 1.59% to close at a level of Rp13,313 per USD. Rupiah momentum persisted into July 2016, gaining a further 1.72% to close at Rp13,112 per USD. Domestically, rupiah appreciation was supported by the encouraging domestic economic outlook in line with a maintained macroeconomic stability, alongside the recently enacted Tax Amnesty. In terms of the external sector, rupiah appreciation was driven by less risk on global financial markets due to the limited impact of the Brexit and the expected postponement of the next inevitable Federal Funds Rate (FFR) hike. Moving forward, Bank Indonesia will continue to maintain exchange rate stability in line with the rupiah’s fundamental value.

Low inflation was controlled within the target corridor for 2016 of 4±1%. CPI inflation was recorded at 0.69% (mtm) or 3.21% (yoy) in July 2016. Furthermore, headline inflation during Eid-ul-Fitr this year was controlled at a level below the historical average for the past four years due to concerted policy efforts and tight coordination between Bank Indonesia and the Government during the approach to Eid-ul-Fitr. Volatile foods (VF) along with low core inflation contributed to control inflation during the reporting period. VF inflation during Eid-ul-Fitr was also below the historical average for the past four years due to lower prices of various food commodities despite the annual spike in demand during the approach to Eid-ul-Fitr. On the other hand, more expensive airfares, intercity fares and rail fares exacerbated inflationary pressures on administered prices (AP), which were weighed down by low core inflation, namely 0.34% (mtm) or 3.49% (yoy). Such conditions were consistent with persistently limited domestic demand, rupiah appreciation and anchored inflation expectations. Looking forward, policy coordination between Bank Indonesia and the Government to control inflation will continue, particularly in terms of VF inflation stemming from La Nina. Consequently, Bank Indonesia predicts inflation at the end of 2016 within the target corridor.

The financial system remained stable and banking sector resilience was maintained, on the back of strong capital and adequate liquidity. At the end of Semester II-2016, the Capital Adequacy Ratio (CAR) stood at 22.3%, and liquid asset/bank deposit ratio at 20.3%, while non-performing loans (NPL) were recorded at 3.1% (gross) or 1.5% (net). Looser monetary policy was transmitted to the economy through the interest rate channel, as banks continued to lower lending rates. Meanwhile, monetary policy transmission through the credit channel is not yet considered optimal, evidenced by limited credit growth. Credit growth at the end of Q2 is at 8.9% (yoy), increased from 8.7% the previous quarter. On the other hand, deposit growth was observed to slow from 6.4% (yoy) the previous quarter to 5.9% (yoy). Bank Indonesia expects the looser monetary and macroprudential policy mix, coupled with the tax amnesty, to stimulate credit growth and, therefore, encourage future economic growth.  

Jakarta, August 19th 2016
Communication Department

Tirta Segara
Executive Director

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1As of today (19/8), the BI Rate is no longer Bank Indonesia’s policy rate. A detailed explanation of the monetary operations framework is attached.

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