Bank Indonesia Cuts Policy Rate: Macroeconomic Stability Maintained, Strengthening Recovery Momentum - Bank Sentral Republik Indonesia
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July 18, 2019

No.19/73/DKom

The BI Board of Governors agreed on 20th and 22nd September 2017 to lower the BI 7-day Reverse Repo Rate 25 basis points (bps) from 4.50% to 4.25%, while also lowering the Deposit and Lending Facility rates 25 bps to 3.50% and 5.00% respectively, effective 25th September 2017. The decision was consistent with low inflation, estimated to continue till the end of 2017, and 2018 and 2019 inflation projected to stay below the mid range of the target, as well as current account deficit under control within a heatlhy range. External risks, specifically related to FFR hike and US balance sheet normalization plans, have also been accounted for. The rate cut is expected to support the ongoing improvements in banking intermediation and domestic economic recovery. Bank Indonesia views that the current level of policy rate is sufficient in accordance with the forecast of inflation and other macroeconomics. Furthermore, Bank Indonesia will continue to coordinate with the Government to reinforce policy mix in order to maintain macroeconomic stability and strengthen economic recovery momentum.

The global economic outlook is projected to improve, especially in advanced economies. US economic growth is expected to be higher than previously projected, as domestic demand improves. Likewise, growth in Europe accelerated on the back of increasing consumption and less financial sector uncertainty. In the developing countries, solid consumption and increased lending in China translated into stronger economic growth. Increasing economic growth in this country is expected to compensate lower growth in India. On the commodity markets, the oil price was relatively stable, while export prices from Indonesia remained comparatively high, particularly coal and copper. Improvement in global economy has positive impacts to Indonesia’s export performance, while international commodity prices are set to remain high. Meanwhile, risks in the global financial markets are relatively maintained, as the FOMC’s decisions related to the FFR and US balance sheet normalization are consistent with market expectations. The FOMC decisions are also in line with Bank Indonesia expectation.

Indonesia’s economy in the third quarter of 2017 is estimated to improve in several sectors. Improvement in domestic demand, especially household consumption, reflected by improvement in retails and durable goods sales. Robust building investment is expected to persist, in line with government spending. Non-building investment is expected to improve, especially in export commodity based industry, along with the high commodity prices. By sector, improvements, although remain weak, began to show in the Trade, Hotels and Restaurants (THR) sector. The manufacturing sector is also expected to improve, especially those related to export activities, such as other transport equipment, chemicals and pharmacy. Moving forward, economic growth is expected to improve along with more expansive government spending and Bank Indonesia’s monetary policy easing. Consequently, Bank Indonesia maintains its prediction for 2017 national economic growth in the 5.0-5.4% range, accelerating in 2018 to 5.1-5.5%.

Indonesia’s trade surplus returned. The trade surplus was supported by an increase in the non-oil and gas trade surplus that exceeded the growing oil and gas trade deficit. Cumulatively from January to August 2017, the trade surplus stands at USD9.11 billion, nearly doubling the USD5.13 billion recorded in the same period one year ago. Meanwhile, foreign capital inflows to financial markets in Indonesia reached USD9.17 billion as of August 2017. Consequently, the position of official reserve assets at the end of August 2017 stood at USD128.8 billion, equivalent to 8.9 months of imports or 8.6 months of imports and servicing government external debt, well exceeds the international standard of around three months.

The Rupiah was stable, with the value trending upwards. In August 2017, the Rupiah appreciated by an average of 0.02% to Rp13,343 per USD after the value of the USD slumped and an influx of foreign capital flowed onto the domestic FX market, leading to a net supply. USD depreciation stemmed from the dovish statements relayed by the Federal Reserve and European Central Bank (ECB), along with concerns over US growth. Meanwhile, foreign capital flows were drawn to positive yields in Indonesia. Furthermore, rupiah exchange rate volatility was mitigated and, therefore, lower than reported in peer countries. Notwithstanding, Bank Indonesia will continue to stabilise the rupiah in line with the currency’s fundamental value, while maintaining market mechanisms.

Inflation was controlled at a rate lower than previously expected. CPI inflation in August 2017 stood at 2.53% (ytd) or 3.82% (yoy) after supply improved as demand returned to normal in the wake of Eid-ul-Fitr and the school holidays, combined with government policy and close coordination with Bank Indonesia. Furthermore, core inflation was recorded at its lowest rate for the past three years. Moving forward, low inflation is expected to persist within the target range, supported by anchored expectations, relatively stable exchange rates and the downward global inflation trend. Nevertheless, Bank Indonesia will continue to strengthen policy coordination with the central government and regional administrations to control inflation, to support achievements of the inflation targets at 4.0±1% in 2017 and at 3.5±1% in 2008 and 2019.

Financial system stability maintained, albeit slow banking intermediary functions. Stability is reflected in a high Capital Adequacy Ratio (CAR) of 23.0% and liquidity ratio of 23.3% in July 2017, while non-performing loans (NPL) stood at 3.0% (gross) or 1.4% (net). However, banking intermediation has not shown signs of improvement. July’s credit growth, while improving from 7.8% (yoy) in the previous month, remained low at 8.2% (yoy). High credit growth occur only on building, electricity, services and agriculture sectors, while other sectors’ growth remained low. Deposit growth decelerated from 10.3% (yoy) to 9.7% (yoy), decreasing especially in the forex deposit. Moving forward, bank intermediation is expected to improve in line with BI’s decision to perform rate cut and macroprudential policy easing, while banking and corporation consolidation continues.. In addition, economic financing through capital markets is also expected to improve, in line with financial markets deepening efforts.

Jakarta, 22 September 2017
Communication Department

Agusman
Executive Director

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