BI 7-day Reverse Repo Rate Raised by 50 bps to 5.25%: Further Policy Mix Response to Strengthen Economic Stability - Bank Sentral Republik Indonesia
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May 23, 2019

No.20/51/DKom

The BI Board of Governors agreed on 28-29th June 2018 to raise the BI 7-day Reverse Repo Rate by 50 bps to 5.25%, while also raising the Deposit Facility (DF) and Lending Facility (LF) rates by 50 bps to 4.50% and 6.00% respectively, effective 29th June 2018. The policy raise hike decision is Bank Indonesia’s pre-emptive, front-loading, and ahead of the curve move to maintain the domestic financial market’s competitiveness against several countries’ changing monetary policies as well as high global uncertainty. The policy is still backed by dual intervention policy in the foreign exchange market and government securities (SBN) market as well as the monetary operations strategy to maintain adequate liquidity, particularly in the rupiah money market and interbank swap market. Bank Indonesia is confident that the policy measures will effectively strengthen economic stability, specifically the Rupiah exchange rate stability. Moving forward, Bank Indonesia will continue to monitor the domestic and global economic developments and outlook, to strenghten future policy mix responses.
Bank Indonesia also implemented accomodative macroprudential policy by relaxing the loan-to-value (LTV) ratio in order to maintain domestic economic recovery momentum and financial system stability, keeping into account the prudential principles and consumer protection The policy, effective on 1st August 2018, is applicable to the property sector as follows: (i) relaxing the LTV ratio for property loans and FTV ratio for property financing; (ii) relaxing the number of credit or financing facilities available through the pre-order mechanism; and (iii) amending the stages and limits applicable to liquidate loans/financing. The policy is expected to stimulate the property sector, which currently still has a potential to accelerate and significant multiplier effect on the national economy (Appendix 1). Furthermore, the macroprudential policy also reinforces previous macroprudential policies concerning the Macroprudential Intermediation Ratio (MIR) and Macroprudential Liquidity Buffer (MLB), which aim to catalyse the bank intermediation function and strengthen bank liquidity management. The policy move is also synergised with implementation of the average rupiah reserve requirement as part of Bank Indonesia’s efforts to reformulate the monetary policy operational framework, thereby increasing liquidity management flexibility in the banking industry and nurturing the bank intermediation function, while supporting financial market deepening. The three policies will become effective on 16th July 2018 for conventional banks and 1st October 2018 for sharia banks (Appendix 2 and 3).
The global economy faces tighter liquidity as uncertainty blights the financial markets amid persistent international economic gains projected in 2018. The global economic growth projection has been upgraded from 3.8% to 3.9% on the back of US economic gains, solid growth in Europe and resilient growth in China. The promising global economic outlook is expected to induce the increasing world trade volume, thus maintaining high international commodity prices. Nevertheless, global liquidity tightening and global financial market uncertainty are explained by expectations of an aggressive FFR hike after the FOMC meeting in June 2018, coupled with high UST yield volatility. Ubiquitous global uncertainty also stems from ECB policy to reduce asset purchases, PBoC policy to lower the reserve requirement, the rising global oil price and deteriorating US-China trade relations. The uncertainty could feed through to broad USD appreciation and trigger a capital reversal from developing economies, thereby prompting broad currency depreciation, including the Rupiah. Such condition requires proper policy response to keep financial market yield in emerging countries interesting to investors.
Rupiah exchange rates defied depreciatory pressures in June 2018, which intensified in the second half of the month as the USD strengthened globally. The rupiah appreciated until the middle of June 2018, hitting Rp13,853/USD on 6th June, in line with Bank Indonesia’s pre-emptive, front-loading and ahead-of-the-curve policy response taken at the end of May 2018. Nevertheless, the more aggressive change in stance adopted by the Federal Reserve at the Federal Open Market Committee (FOMC) meeting in the middle of June, combined with the changing central bank policy response in other countries, specifically in Europe and China, as well as global financial market uncertainty, triggered depreciation nearly all global currencies, including the Rupiah. On 28th June 2018, the rupiah stood at Rp14,390/USD, falling 3.44% (ptp) on the level recorded at the end of May 2018. Compared with conditions at the end of December 2017, the rupiah has fallen 5.72% (ytd), which is less severe than the depreciation experienced in other developing economies, such as The Philippines, India, South Africa, Brazil, and Turkey. Bank Indonesia will remain vigilant of the global financial market uncertainty, while continuing to stabilise the rupiah in line with the currency’s fundamental value and maintaining market mechanisms, backed by financial market deepening efforts.
Inflation remains under control within the target corridor, supported by stable food prices and anchored expectations. CPI inflation accelerated in May 2018 to 0.21% (mtm) from 0.10% (mtm) the month earlier in line with the onset of Ramadan. Despite accelerating, headline inflation in May 2018 was lower than the historical average during the holy fasting month for the past four years. Annually, inflation decelerated to 3.23% (yoy) in the reporting period from 3.41% (yoy) the month earlier. Controlled CPI inflation was backed by stable core inflation as a result of policy consistency from Bank Indonesia to help form rational inflation expectations, including through exchange rate intervention to ensure the currency’s fundamental value. In addition, volatile foods (VF) experienced inflation but at a rate lower than the historical average for Ramadan. Meanwhile, rising airfares to meet seasonal demand edged up administered prices (AP) in the reporting period. Bank Indonesia predicts inflation in 2018 to remain under control within the inflation target of 3.5±1%. Furthermore, policy coordination between Bank Indonesia and the Government to control inflation is constantly strengthened.
Domestic demand continued to drive domestic economic growth momentum in the second quarter of 2018. Rising incomes on fiscal stimuli and controlled inflation are maintaining household consumption, coupled with increasing consumer confidence amongst the middle and upper classes. Solid consumption is reflected in stronger automotive and retail sales. Meanwhile, investment growth is still resilient, backed by private building investment and infrastructure projects as well as non-building investment linked to infrastructure and mining. In addition, increasing cement and heavy equipment sales also point to strong investment. Solid domestic demand has stimulated a surge of imports, particularly of capital goods and raw materials, while export growth remains in positive territory in line with the global economic recovery. Bank Indonesia predicts national economic growth in the 5.1-5.5% range in 2018.
Indonesia’s trade balance recorded a narrower deficit in May 2018, supported by gains in the non-oil and gas trade balance. The trade deficit stood at USD1.52 billion in May 2018, down from USD1.63 billion the month earlier. The reduction stemmed from a deeper decline in the non-oil and gas trade deficit than the increase in the oil and gas trade deficit. The non-oil and gas trade deficit narrowed on increasing non-oil and gas exports, particularly shipments of electrical machinery and equipment, metal ore, crust and dust, iron and steel, knitted garments and lead. On the other hand, non-oil and gas imports also surged to fuel increasing production and investment activities. Cumulatively from January-May 2018, the non-oil and gas trade surplus stands at USD2.20 billion. The position of official reserve assets was recorded at USD122.9 billion in May 2018, equivalent to 7.4 months of imports or 7.2 months of imports and servicing government external debt, which is well above the international standard of three months. Bank Indonesia expects the current account deficit to remain in line with the previous projection, which is comfortably below the 3% threshold.
The financial system is stable and the bank intermediation function is improving. A relatively high Capital Adequacy Ratio (CAR) was reported by the banking industry at 22.1%, with a sound liquidity ratio at 20.3% in April 2018. In addition, the banking industry maintained a low level of non-performing loans (NPL) at 2.79% (gross) or 1.28% (net) in April 2018. Financial system stability contributed to the improving the bank intermediation function. Deposit growth in April 2018 accelerated to 8.1% (yoy), from 7.7% (yoy) the previous month. The banking industry confirmed a bump in credit growth from 8.5% (yoy) the month earlier to 8.9% (yoy), with the trend expected to persist. On the other hand, economic financing through the financial markets increased 15.8% (yoy) in April 2018, dominated by IPOs and rights issues, corporate bonds, medium-term notes (MTN) and Negotiable Certificates of Deposit (NCD). Considering the economic gains and progress of corporate sector and banking industry consolidation, Bank Indonesia projects credit and deposit growth in 2018 at 10.0-12.0% (yoy) and 9.0-11.0% (yoy) respectively. Several steps are needed to optimize credit growth through accommodative macroprudential policy.  
Jakarta, 29th June 2018
Communication Department
 
Agusman
Executive Director
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