Bank Indonesia Holds Policy Rate: Maintaining a Recovery Momentum Amidst the Global Economic Improvement - Bank Sentral Republik Indonesia
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April 27, 2018

No.19/95/DKom

The BI Board of Governors agreed on 13th and 14th December 2017 to hold the BI 7-day Reverse Repo Rate at 4.25%, while maintaining the Deposit Facility (DF) and Lending Facility (LF) rates at 3.50% and 5.00% respectively, effective 15th December 2017. The policy is consistent with efforts to maintain macroeconomic and financial system stability, while also building domestic economic recovery momentum by considering the latest global and national economic dynamics.Bank Indonesia perceives the previous easing of monetary policy as sufficient to continue driving the economic recovery process against a backdrop of increasingly robust macroeconomic stability. Looking forward, Bank Indonesia will remain vigilant of the global risks associated with the monetary policy normalisation in several advanced countries and the geopolitical risks, as well as corporate consolidation at home along with the suboptimal bank intermediation function. Furthermore, Bank Indonesia shall continue to improve it mix of monetary policy, macroprudential policy and payment system policy to strike an optimal balance between macroeconomic and financial system stability and the ongoing economic recovery process. In addition, Bank Indonesia will also strengthen policy coordination in conjunction with the Government in order to preserve macroeconomic and financial system stability. Bank Indonesia currently believes that amidst the global economic gains and domestic economic stability achieved lies an opportunity to build stronger and more sustainable domestic economic momentum through consistent structural reforms.

The global economic recovery is becoming more balanced, accompanied by persistently high commodities prices. Global economic growth in 2017 is projected to surpass that achieved in 2016, with more balanced sources of growth from advanced as well as developing countries. US GDP growth ticked upwards on the back of increasing investment and stable consumption. Congruently, the economy of Europe posted solid gains, supported by consumption and export performance. Furthermore, consumption and exports also helped to drive China’s economy in line with the economic rebalancing process that is currently underway gradually in the country. Such developments edged up world trade and international commodities prices, including oil, which was higher than the previous year. Meanwhile, the increase of FFR in the US by 25 bps on 13 December 2017 was inline with Bank Indonesia’s estimation. Moving forward, world economic growth is expected to remain high, along with strong commodities prices and world trade volume. However, several risks will continue to demand vigilance, including monetary policy normalisation stance adopted in several advanced countries along with geopolitical factor.

Indonesia’s economic recovery occurs gradually and uneven. National economic growth is projected at 5.10% (yoy) for 2017, increased from 5.02% (yoy) in 2016. The domestic economic growth has been bolstered by a surge of commodity exports that drive the non-building investment, particularly amongst commodity-based firms. Fiscal stimuli from the Government related to infrastructure development also encourages building investment. On the other hand, investment in non-commodity sectors has not shown significant improvement. The household propensity to consume has seen only limited improvements, in particular on foods and clothing expenditures, with a shift in consumption pattern to leisure, also the preference for delaying consumption in upper-middle class society. In 2018, the economy is expected to build further momentum based on equitable investment, fiscal stimuli from the Government, and the favourable impact of global economic gains. Consequently, Bank Indonesia projects economic growth in 2018 at 5.1-5.5% (yoy).

Indonesia’s balance of payments (BOP) in 2017 is expected to register a comparatively large surplus and maintaining a healthy current account deficit of below 2% of GDP. The significant BOP surplus primarily stemmed from the capital and financial account, which increased on the position recorded in 2016, particularly in the form of direct and portfolio investments, inline with the improvement in investor perceptions of the domestic economic outlook.The controlled current account deficit was supported by a large non-oil and gas trade surplus despite a wider oil and gas trade deficit. Nevertheless, the services account and primary income account also recorded large deficits linked, others, to a large transportation services account deficit and the repatriation payments on foreign investment returns. The position of official reserve assets at the end of November 2017 stood at USD125.97 amongst billion, up from USD116.4 billion at the end of 2016. The official reserve is equivalent to 8.4 months of imports or 8.1 months of imports and servicing government external debt, which is well above the international standard of around three months. Looking ahead, Bank Indonesia projects a slightly wider current account deficit in 2018 due to the ongoing domestic economic recovery but remaining at a healthy level of 2.0-2.5% of GDP.

The rupiah remained relatively stable throughout 2017 despite the emergence of external pressures at the beginning of the fourth quarter. The rupiah was stable as of September but external factors began to erode the value of the currency in October 2017. Nevertheless, rupiah depreciation was consistent with broad USD appreciation against nearly all major global currencies after US began to normalise its monetary policy stance, confirmed upcoming tax reforms and the markets anticipated a further FFR hike towards the end of the year. In November, the rupiah rebounded in line with maintained macroeconomic stability and the promising domestic economic outlook, so that by point-to-point (ptp), the rupiah appreciated 0.27% (mtm) to close at a level of Rp13,526 per USD. Moving forward, Bank Indonesia shall continue to stabilise rupiah exchange rates in line with the currency’s fundamental value, while maintaining market mechanisms.

Inflation is maintained at the low level of 3.5% (yoy), which is still within the inflation target of 4.0±1% for 2017. Low and controlled inflation is mainly contributed by the low inflationary pressures on volatile foods (VF) due to adequate supply, government policy to stabilise food prices and low international food prices. The volatile foods inflation currently stands at its lowest rate in the past 14 years. Core inflation also continued to decline thanks to anchored expectations, stable exchange rates and limited domestic demand. Meanwhile, inflationary pressures on administered prices (AP) intensified mainly due to the 900 VA electricity tariff increase in the first half of 2017, as part of ongoing government-led energy reforms. The Consumer Price Index (CPI), as a measure of headline inflation, stood at 0.20% (mtm) in November 2017, bringing the cumulative and annual rates to 2.87% (ytd) and 3.30% (yoy) respectively. Bank Indonesia projects low and controlled inflation in 2018 within the new target corridor of 3.5±1%. Furthermore, Bank Indonesia will constantly strengthen policy coordination with the Central Government and Regional Administrations in order to control inflation.

Financial system stability was maintained despite a suboptimal bank intermediation function. Such dynamics were explained by a Capital Adequacy Ratio (CAR) in the banking industry of 23.2% and a liquidity ratio of 22.7% as of October 2017. Meanwhile, non-performing loans (NPL) were recorded at 2.96% (gross) and 1.25% (net). Monetary policy was successfully transmitted through the interest rate channel, as evidenced by the banks’ proclivity to continue lowering deposit and lending rates. Nonetheless, transmission through the credit channel was less optimal, indicated by limited credit growth in line with weak demand for new loans and the selective nature of banks when disbursing new loans. Consequently, credit growth in October 2017 stood at 8.16% (yoy), up from 7.86% (yoy) the month earlier. Conversely, growth of economic financing through the financial markets, including issuances of stocks, bonds and medium-term notes (MTN), surged to 45.5% (yoy) in October 2017. Meanwhile, deposit growth was observed to decelerate from 11.7% (yoy) to 11.0% (yoy) over the same period. In 2017, deposit and credit growth have expanded by 9.0% and 8.0% respectively. Congruent with increasing economic activity and the impact of previous monetary and macroprudential policy easing, Bank Indonesia projects stronger deposit and credit growth for 2018 at 9.0-11.0% (yoy) and 10.0-12.0% (yoy) respectively.

Jakarta, 14th December 2017
Communication Department

Agusman
Executive Director

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