BI 7-Day Reverse Repo Rate Held at 4.25%: Maintaining Recovery Momentum Amid Escalating Global Risk - Bank Sentral Republik Indonesia
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May 23, 2019

No.20/23/DKom

The BI Board of Governors agreed on 21st and 22nd March 2018 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 23rd March 2018. The policy is consistent with efforts to maintain macroeconomic and financial system stability, while supporting the domestic economic recovery. Bank Indonesia considers the previous measures taken to ease monetary policy adequate in terms of building domestic economic recovery momentum. Moving forward, Bank Indonesia will remain focused on maintaining economic stability as the foundation of strong and sustainable economic growth. Furthermore, Bank Indonesia will remain vigilant of the risks, including external risks such as growing global financial market uncertainty and several countries’ tendency to implement inward-oriented trade policy, as well as the domestic risks linked to inflation. To that end, Bank Indonesia continues to optimise the mix of monetary, macroprudential and payment system policies to maintain an optimal balance between macroeconomic stability, financial system stability and the current domestic economic recovery process, primarily in terms of mitigating the near-term risks. In addition, Bank Indonesia also strengthens policy coordination with the Government to maintain macroeconomic and financial system stability, while enhancing structural reforms.

Global economic growth is projected to accelerate in 2018 despite several risk factors that demand vigilance. Economic gains in advanced and developing economies will drive the global economic recovery. In the advanced economies, US economic growth in 2018 is estimated to be higher on the back of stronger investment and consumption as fiscal stimuli takes effect. Bank Indonesia correctly predicted the Fed’s 25bps FFR hike on 21st March 2018. Bank Indonesia also predicts that the US monetary policy normalisation will continue, with another FFR hike. Meanwhile, Europe’s economy is projected to accelerate on surging exports, consumption and accommodative monetary policy. In the developing economies, China is expected to maintain solid economic growth on growing consumption despite economic rebalancing eroding investment, especially in real estate. The promising global economic recovery outlook will catalyse world trade volume and elevate international commodity prices, including oil. Notwithstanding the global economic tailwinds, several external risks will continue to demand vigilance. Higher US growth can potentially prompt the FFR hike to occur sooner than previously expected. Meanwhile, several countries’ tendency to implement inward-oriented trade policy could trigger retaliatory measures from other countries, which could lower world trade volume and economic growth.

Indonesia’s economic growth in the first quarter of 2018 is predicted to be higher than the first quarter of 2017, backed by increasing government investment and consumption, stable private consumption and positive export performance. Increasing investment occurs mainly in the construction sector in line with the completion of various infrastructure projects and the primary sector with growing external demand. Stable private consumption is backed by maintained public purchasing power and increasing spending in relation to the upcoming local elections. Furthermore, increasing social assistance and village fund disbursements buoyed government consumption. On the external front, the ongoing global economic recovery will maintain exports in positive territory. Congruent with rising exports, imports are also predicted to increase for investment and export purposes with a high import content. Consequently, Indonesia’s economy is projected to grow in the 5.1-5.5% (yoy) range in 2018.

As of February 2018, the Indonesia trade balance recorded a deficit as the national economy accelerates. The trade deficit stood at USD0.12 billion in February 2018, down from USD0.76 billion the month earlier. Cumulatively, from January – February 2018, the trade balance recorded a USD0.87 billion deficit, as production activities were ramped up and investment increased on domestic economic gains, which drove non-oil and gas imports, particularly in the form of raw materials and capital goods. Meanwhile, foreign capital income up to February 2018 reached USD0.30 billion, lower that that of the same period last year. This development leads to the position of reserve assets stood at USD128.06 billion at the end of February 2018, equivalent to 8.1 months of imports or 7.9 months of imports and servicing government external debt, which is well above the international standard of three months. Moving forward, in line with improvements in the dometic economic recovery, current account deficit on 2018 is expected to remain within the range of 2.0-2.5% of GDP, or under control and within a safe threshold, which is not more than 3% of GDP.

The rupiah tended to depreciate in February 2018 in line with regional currencies, mainly due to increased uncertainty in the global financial market. The rupiah depreciated by an average of 1.65% to Rp13,603/USD in February 2018. The hawkish statement by The Fed Chairman led the market to predict a sooner and higher FFR hike. This drives capital reversal as well as depreciation in various global currencies, including Indonesia’s. The rupiah depreciation still continues in the beginning of March 2018 as market sentiment decreased due to the inward-oriented policies and its potential to lead to retaliations from other countries. Bank Indonesia will continue to monitor the risk of global financial market uncertainty, while taking exchange rate stabilisation measures to safeguard the currency’s fundamental value and maintain market mechanisms.

Inflation remained under control in February 2018 and within the target corridor. CPI inflation stood at 0.17% (mtm) in February 2018, down from 0.62% (mtm) the month earlier. Annually, CPI inflation remained within the 3.5±1% target range at 3.18% (yoy). Core inflation decelerated on anchored expectations, which helped to lower headline inflation. In addition, inflationary pressures on volatile foods (VF) subsided, despite rising rice prices. Conversely, inflationary pressures accumulated on administered prices (AP) as the government adjusted non-subsidised fuel prices and non-PLN electricity rates. Consequently, Bank Indonesia predicts inflation to remain within the target corridor in 2018, underpinned by strong policy coordination between Bank Indonesia and the Government to control inflation, primarily in anticipation of potential pressures on volatile foods.

The financial system remains stable despite a sluggish bank intermediation function. Maintained financial system stability is reflected saliently in the high Capital Adequacy Ratio (CAR) of the banking industry, reaching 23.2%, and a liquidity ratio of 23.2% in January 2018. Meanwhile, non-performing loans (NPL) increased slightly in January 2018 to 2.9% (gross) or 1.3% (net). Monetary and macroprudential policy easing was successfully transmitted through the interest rate channel, with the banks inclined to lower deposit and lending rates by 196bps and 151bps respectively since Bank Indonesia began to ease monetary policy. Nonetheless, transmission through the credit channel remained ineffective due to weak demand for new loans together with selective bank lending. Consequently, credit growth stood at 7.4% (yoy) in January 2018, down from 8.2% (yoy) the month earlier. In addition to weak demand for new loans, the cyclical downtrend of bank intermediation at the beginning of each year also undermined credit growth. Despite muted loan growth, economic financing through the capital market, including initial public offerings (IPO) and rights issues, corporate bonds and medium-term notes (MTN), soared 99.8% in January 2018 in line with financial market deepening efforts. In contrast, deposit growth slowed from 9.4% (yoy) to 8.4% (yoy) in January 2018. Nevertheless, based on the current economic improvements and progress in terms of corporate and banking sector consolidation, Bank Indonesia predicts credit and deposit growth to accelerate in 2018 in the 10-12% and 9-11% ranges respectively.

Jakarta, 22 March 2018
COMMUNICATION DEPARTMENT

Agusman
Executive Director

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