BI Continues to Ease Its Monetary Policy by Lowering BI 7-Day Reverse Repo Rate 25 bps - Bank Sentral Republik Indonesia
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September 16, 2019

No.18/ 78 /DKom

The BI Board of Governors agreed on 21-22nd September 2016 to lower the BI 7-day Reverse Repo Rate (BI 7-day RR Rate) 25 basis points (bps) from 5.25% to 5.00%, while also lowering the Deposit and Lending Facility rates 25 basis points to 4.25% and 5.75% respectively, effective 23th September 2016. The ongoing macroeconomic stability, as evidenced by low inflation, a controlled current account deficit and relatively stable exchange rates, encouraged Bank Indonesia to ease monetary policy by lowering the BI 7-Day RR Rate. Against a sluggish global economic backdrop, the eased monetary policy stance adopted by Bank Indonesia is expected to strengthen efforts to boost domestic demand, thereby maintaining economic growth momentum while preserving macroeconomic stability. Bank Indonesia believes that by easing monetary policy, government efforts to stimulate sustainable growth through accelerated structural reforms will be strengthened. Furthermore, Bank Indonesia will continue to coordinate with the Government in preparing policy measures to ensure an optimal impact of the recently enacted Tax Amnesty on the national economy.

Lower-than-projected global economic growth has become a tangible possibility, along with a significant drop in the world trade volume. US growth for 2016 has been revised downwards due to weak investment data. Meanwhile, the lacklustre US recovery, coupled with widespread uncertainty blighting the US economy, has prompted the Fed to keep the Federal Funds Rate (FFR), with expectations of a hike just once in 2016. On the other hand, weak investment and consumption activities in Europe has undermined its economic growth. China also experienced potential economic moderation as investment and government spending slowed while consumption remained sluggish. On commodity markets, the global oil price fell as OPEC ramped up production. In contrast, the prices of several export commodities from Indonesia continued to rebound, especially crude palm oil (CPO).

Domestic economic growth in Q-3 is still maintained, albeit not as strong as previously projected. Various indicators show signs of solid household consumption, while non-construction investment has not shown any significant signs of improvement. Private investors remain muted in line with consolidations in the private sector in response to demand that has not yet fully recovered. Meanwhile, Bank Indonesia expects limited fiscal stimuli as the Government adjusts spending in the second half of the year. In terms of the external sector, Bank Indonesia also forecasts the sluggish global economy and world trade to restrain export gains despite indications that prices of several export commodities have started to rebound. Consequently, Bank Indonesia acknowledges the pressing need for various measures to boost domestic demand and, thus, reinforce economic growth momentum. Therefore, economic growth for 2016 is predicted in the 4.9-5.3% range.

Indonesia’s trade balance recorded another surplus in August 2016, supported by a growing non-oil and gas trade balance. The trade surplus stood at USD0.29 billion in the reporting period, down from USD0.51 billion the month earlier. The surplus narrowed on the back of a smaller non-oil and gas trade surplus and growing oil and gas deficit. A surge in imports of raw materials and capital goods, including mechanical/electrical machinery and equipment, as well as plastic and plastic articles, reduced the non-oil and gas trade surplus, while also demonstrating gains in terms of domestic economic activities. On the other hand, non-resident capital inflows to domestic financial markets in Indonesia reached USD11.1 billion in August 2016, exceeding the overall total for 2015. Consequently, the position of official reserve assets at the end of August 2016 stood at USD113.5 billion, equivalent to 8.7 months of imports or 8.3 months of imports and servicing government external debt, which exceeds the international adequacy standards of three months.

Limited rupiah depreciation was observed in August 2016, before rebounding thereafter in September. Accordingly, the rupiah depreciated by an average of 0.39% in the reporting month to a level of Rp13,163 per USD. Negative external sentiment concerning the timing of the proposed FFR hike after the minutes of the July Federal Open Market Committee (FOMC) were released precipitated rupiah depreciation. Nonetheless, the rupiah was observed to rebound 0.8% in the middle of September. The rebound was prompted by an increase in foreign capital as the negative sentiment surrounding FFR hike timing eased, as well as the ongoing implementation of Tax Amnesty. Moving forward, Bank Indonesia will continue to maintain currency stability in line with the rupiah’s fundamental value.

Inflation remained low and is projected within the target corridor set for 2016, namely 4±1%. Milder inflationary pressures were reported after Eid-ul-Fitr this year, with deflation of 0.02% (mtm) recorded in August 2016, which is the lowest rate after Eid-ul-Fitr for the past five years, when inflation is typically considered the norm. Consequently, headline inflation was recorded at 1.74% (ytd) or 2.79% (yoy). CPI deflation in the reporting period was attributed to volatile foods (VF) and administered prices (AP), which experienced price corrections in the wake of Eid-ul-Fitr. Volatile foods (VF) recorded deflation of 0.80% (mtm) but inflation of 5.28% (yoy) on an annualised basis. The monthly decrease in prices stemmed primarily from several foodstuffs. On the other hand, administered prices (AP) recorded deflation of 0.52% (mtm) or 0.91% (yoy) as the prices of inter-city fares, airfares and rail tickets were lowered. In addition, core inflation remained relatively low and stable at 0.36% (mtm) or 3.32% (yoy) in line with limited domestic demand, anchored inflation expectations and stable rupiah exchange rates. Consequently, Bank Indonesia predicts inflation near the floor of the target corridor for 2016.

Financial system stability and banking system resilience were maintained. In July 2016, the Capital Adequacy Ratio (CAR) stood at 20.8%. Meanwhile, non-performing loans (NPL) were recorded to increase, at 3.2% (gross) or 1.5% (net). Monetary policy easing was successfully transmitted through the interest rate channel as the banks were inclined to lower lending and deposit rates. However, monetary policy transmission through the credit channel remained suboptimal, reflected by limited credit growth. New loans grew at 7.7% (yoy) in July 2016, decelerating from 8.9% (yoy) the month earlier. Meanwhile, deposit growth was stable at 5.9% (yoy). Bank Indonesia is satisfied that monetary and macroprudential policy easing will catalyse credit growth in order to stimulate economic growth moving forward.

Jakarta, 22nd September 2016
Communication Department

Tirta Segara
Executive Director

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