BI 7-day Reverse Repo Rate Raised by 25 bps to 4.50%: Strengthening Policy Mix to Secure Macroeconomic Stability - Bank Sentral Republik Indonesia
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May 25, 2019
No. 20/ 44 /DKom
The BI Board of Governors agreed on 16th and 17th May 2018 to raise the BI 7-day Reverse Repo Rate by 25 bps to 4.50%, while also raising the Deposit Facility (DF) and Lending Facility (LF) rates by 25 bps to 3.75% and 5.25% respectively, effective 18th May 2018. The policy is implemented as part of Bank Indonesia’s policy mix to maintain economic stability amid the escalating risks in the global financial market and global liquidity downturn. Bank Indonesia also continues to implement rupiah exchange rate stabilisation measures in line with its economic fundamentals, while maintaining market mechanisms. The policy is backed by monetary operations that aims to maintain adequate liquidity in the foreign exchange and money markets. Furthermore, Bank Indonesia also implements macroprudential policy, which includes maintaining the Countercyclical Capital Buffer (CCB) at 0%, to maintain financial system stability and improve banking intermediation function. Bank Indonesia will also constantly strengthen policy coordination with the Government and other relevant authorities to maintain macroeconomic and financial system stability as well as to strengthen structural reforms. Bank Indonesia considers the previous policy mix and current policy response as consistent with efforts to control inflation within the target corridor of 3.5±1% in 2018 and 2019, while effectively managing external sector resilience. Moving forward, Bank Indonesia will regularly monitor the latest economic developments and ready to implement stronger measures to maintain macroeconomic stability.
Global economic growth in 2018 is projected to improve, despite the ongoing global liquidity rebalancing process. The global economic growth projection for 2018 has been upgraded from 3.8% to 3.9%, mainly due to US economic acceleration stemming from improving investment and consumption, amid the ongoing normalization of US monetary policy. Economic growth in Europe is also predicted to accelerate, backed by exports and consumption as well as accommodative monetary policy. In the developing economies, China is expected to maintain solid growth as consumption and private investment increases and the economic rebalancing process progresses well. The promising global economic outlook will stimulate world trade and keep international commodity prices high, including oil, in 2018. Against a backdrop of increasing global economic recovery momentum, the US dollar liquidity tend to tighten, resulting in the rising US treasury security yields and broad USD appreciation, which  prompted downside pressures on other global currencies. Looking forward, several external risks will continue to demand vigilance, including hikes in the FFR and US treasury security yields, the rising oil price, tension in the US-China trade, and geopolitical issues relating to the cancellation of US-Iran nuclear deal.
Domestic economic growth in Indonesia was solid in the first quarter of 2018, bolstered by domestic demand. First quarter GDP growth was recorded at 5.06% (yoy), higher than the same period last year, which was recorded at 5.01%, backed by increasing investment and resilient private consumption. Investment accelerated from 7.27% (yoy) to 7.95% (yoy), representing the highest rate recorded in the past five years, with growth underpinned by improving non-building investment to fuel increasing production. Strong building investment was maintained in line with ongoing government infrastructure projects. Furthermore, private consumption remains solid as campaign spending is ramped up during the approach to the local elections to be contested this year. Tenacious domestic demand, however, has induced a surge of imports, primarily of capital goods and raw materials, while robust export performance has been maintained, albeit moderating from the previous period. Regionally, economic gains have been reported in Java, Bali Maluku and Papua. Consequently, Bank Indonesia projects national economic growth to remain in the 5.1-5.5% range for 2018.
The current account deficit narrowed in the first quarter of 2018, backed by external sector resilience. The current account recorded a USD5.5 billion deficit (2.1% of GDP) in the first quarter of 2018 compared with a USD6.0 billion deficit (2.3% of GDP) in the last quarter. The smaller current account deficit was mainly attributed to a smaller services trade deficit together with a larger secondary income account surplus. Meanwhile, the capital and financial account maintained a surplus despite growing global financial market uncertainty. The capital and financial account surplus stood at USD1.9 billion in the first quarter of 2018, supported by an influx of direct investment that reflects the favourable domestic economic outlook perceived by global investors.  In April 2018, the trade balance recorded a deficit of USD1.63 billion, mainly due to the increasing non-oil and gas import  as economic activity increased. The position of reserve assets in April 2018 was recorded at USD124.9 billion, equivalent to 7.7 months of imports or 7.4 months of imports and servicing government external debt, which is well above the international adequacy standard of three months. Consistent with increasing domestic economic recovery momentum, Bank Indonesia anticipates a controlled current account deficit in the 2.0-2.5% of GDP range, which is well below the 3% of GDP threshold.
The rupiah depreciated in the first quarter of 2018, sparked by global USD appreciation. By point-to point, the rupiah depreciated 1.47% in the first quarter of 2018 and 1.06% in April 2018. The rupiah exchange rate was controlled on the back of maintained domestic economic fundamentals and appropriate stabilisation measures implemented by Bank Indonesia. The rupiah stabilisation measures during the current period of global liquidity rebalancing was also supported by efforts to optimise monetary operations to maintain adequate liquidity. Bank Indonesia will continue to monitor the risk of global financial market uncertainty by continuing the exchange rate stabilisation measures in line with the rupiah’s fundamental value, while maintaining market mechanisms, supported by efforts in developing the financial market.
Inflation in April 2018 was controlled within the target corridor, underpinned by food price corrections and anchored expectations. CPI inflation stood at 0.10% (mtm) in April 2018, down from 0.20% (mtm) the month earlier. Annually, CPI inflation was recorded at 3.41% (yoy), which is within the target range in 2018 at 3.5±1%. Inflation was controlled in line with volatile foods deflation and lower core inflation, contrasting the slight bump in administered prices. Low and stable core inflation was linked to monetary policy consistency in terms of containing inflationary pressures. Volatile foods recorded deflation after a number of food commodities experienced price corrections. In contrast, the rise in administered prices inflation was down to higher non-subsidised fuel prices. Bank Indonesia expects inflation to remain within the target corridor in 2018, namely 3.5±1%. To that end, policy coordination between Bank Indonesia and the Government will constantly be strengthened, primarily in anticipation of the seasonal spike in demand for volatile foods during Ramadan and Eid-ul-Fitr.
The financial system remains stable and the bank intermediation function is improving. Maintained financial system stability is reflected in the relatively high Capital Adequacy Ratio (CAR) of the banking industry, reaching 22.5%, and a sound liquidity ratio of 21.2% in March 2018. In addition, the non-performing loans (NPL) decreased to 2.75% (gross) or 1.25% (nett) in March 2018. The maintained financial system stability has positively contributed to improving the banking intermediation function. The average deposit and lending rates in rupiah are lowered, though limited, to 5.84% and 11.20%, respectively, in March 2018. The banking industry reported credit growth at 8.5% (yoy) in March 2018, up from 8.2% (yoy) the month earlier. On the other hand, economic financing through the capital market remained high in March 2018, reaching IDR42.9 trillion (gross), mainly from corporate bonds as well as medium-term notes and negotiable certificates of deposit. Nonetheless, the banking industry conceded weaker deposit growth in the reporting period, decreasing from 8.4% (yoy) to 7.7% (yoy). With the domestic economy gaining momentum and ongoing consolidation in the corporate and banking sectors, Bank Indonesia projects stronger credit and deposit growth in 2018 at 10.0-12.0% (yoy) and 9.0-11.0% (yoy) respectively. Bank Indonesia will continue to monitor and mitigate the impact of exchange rate and interest rate dynamics to financial system stability, relating to liquidity, capital, and credit risks, to optimalise healthy banking intermediation.
 
 
Jakarta, 17th May 2018
Communication Department
 
 
Agusman
Executive Director
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