BI 7-day Reverse Repo Rate Raised by 25 bps to 5.50% : Maintaining Stability, Strengthening Economic Resilience - Bank Sentral Republik Indonesia
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September 18, 2020

No. 20/66/DKom

The BI Board of Governors agreed on 14th and 15th August 2018 to raise the BI 7-Day Reverse Repo Rate by 25 bps to 5.50%, while also raising the Deposit Facility (DF) and Lending Facility (LF) rates by 25 bps to 4.75% and 6.25% respectively. The decision is consistent with ongoing efforts to maintain the attractiveness of the domestic financial markets and manage the current account deficit within an acceptable threshold. Bank Indonesia sincerely appreciates and backs the concrete measures taken by the Government to reduce the current account deficit by stimulating exports and reduce imports as well as postponing government projects with a high import content. Bank Indonesia will continue to strengthen coordination with the Government and other relevant authorities to maintain macroeconomic stability and external resilience against a backdrop of increasing global financial market uncertainty. Moving forward, Bank Indonesia will remain vigilant of global and domestic economic dynamics and monitor the economic outlook in order to strengthen the policy mix response to maintain macroeconomic and financial system stability.

The policy rate is reinforced by a sound monetary operations strategy to strengthen interbank rate convergence with the BI 7-Day Reverse Repo Rate, which would enhance monetary policy transmission effectiveness. Furthermore, Bank Indonesia is also continuing measures to accelerate financial market deepening. In the money market, the successful implementation of IndONIA as the reference rate will be accompanied by development of Overnight Index Swap (OIS) and Interest Rate Swap (IRS) instruments, which will ensure a more efficient market rate structure. In the foreign exchange market, Bank Indonesia has improved the effectiveness of foreign exchange swap instruments for monetary operations or hedging through lower prices. Such policies are will provide various alternative instruments to help manage market liquidity and support rupiah exchange rate stability.

Multispeed global economic growth has continued to stoke global economic uncertainty. The US economy continues to gain momentum on the back of accelerating consumption and investment. Meanwhile, the economies of Europe, Japan and China are moderating. Consequently, the Federal Reserve is expected to continue raising the Federal Funds Rate (FFR) gradually, contrasting the reluctance of the ECB and BoJ to hikes policy rates. In addition to the recent FFR hikes, widespread global uncertainty has been exacerbated by simmering trade tensions between the US and several other countries, which have triggered retaliatory actions around the world, including currency depreciation despite broad US appreciation. Global uncertainty has also been fuelled by the risk of spillovers from the economic shocks in Turkey caused by domestic economic fragilities and the adverse impact of negative sentiment surrounding the authorities’ policies, as well as looming tensions with the US. Bank Indonesia will remain vigilant of the external risks, including potential spillover from Turkey although sound economic fundamentals in Indonesia are indicative of solid national economic resilience, coupled with avowed policy commitment.

The national economy has accelerated significantly on strong domestic demand fuelled by private and government consumption.  GDP growth was recorded at 5.27% (yoy) in the second quarter of 2018, the fastest rate since 2013. Meanwhile, household consumption stood at 5.14% (yoy), bolstered by rising incomes, upbeat consumers and controlled inflation. In addition, consumption associated with the local elections also posted solid growth. Meanwhile, government spending has also improved, thereby catalysing strong domestic demand. On the other hand, solid investment growth has been maintained despite fewer total work days in June 2018 that restrained growth slightly. Growing domestic demand has prompted a surge of imports against comparatively subdued export performance. Regionally, the economies of Sumatra, Kalimantan and Papua have been the key drivers of growth, coupled with economic resilience in Java, Sulawesi and Maluku. Looking forward, Bank Indonesia predicts solid economic growth on sound investment and consumption performance despite limited export gains. Building and nonbuilding investment remain strong, backed by infrastructure development and investment in the manufacturing industry. Meanwhile, several upcoming events, including the general election, are expected to maintain consumption. Consequently, Bank Indonesia projects economic growth in 2018 in the 5.0-5.4% (yoy) range, subsequently accelerating to 5.1-5.5% (yoy) in 2019.

Congruent with the uptick in terms of domestic economic activities, the current account deficit increased in the second quarter of 2018. The current account deficit stood at USD8.0 billion (3.0% of GDP) in the second quarter of 2018, up significantly from USD5.7 billion (2.2% of GDP) in the first quarter of 2018. Nevertheless, the current account deficit has remained below the manageable threshold in the first half of the year, averaging 2.6% of GDP. The current account deficit increased on an import surge of raw materials, capital goods and consumer goods due to increasing domestic economic activity, which outpaced export growth. Meanwhile, the capital and financial account surplus increased to record a USD4.0 billion surplus in the second quarter of 2018, up from USD2.4 billion in the previous period. Consequently, the position of reserve assets stood at USD118.3 billion at the end of July 2018, equivalent to 6.9 months of imports or 6.7 months of imports and servicing government external debt, which is well above the international standard of 3 months of imports. Moving forward, Bank Indonesia perceives solid Balance of Payment (BOP) performance and the current account deficit maintained within an acceptable threshold that will reinforce external sector resilience. In addition to demand-side controls, including monetary policy, the government will also reduce the current account deficit by stimulating exports and tourism, while reducing dependence on imports by postponing projects with a high import content.

Exchange rate volatility subsided as the rupiah defied intense depreciatory pressures. Point to point, the rupiah lost 3.94% in value during the second quarter of 2018 and 0.62% in July 2018. Rupiah depreciation was accompanied, however, by lower volatility despite broad USD appreciation. Year to date, the rupiah depreciated by 7.04%, less severe than that reported in India, Brazil, South Africa and Russia. Meanwhile, foreign capital inflows have returned to domestic financial markets, drawn to all asset types. Bank Indonesia will continue to monitor the risk of global financial market uncertainty, while stabilising the rupiah in line with the currency’s fundamental value and maintaining market mechanisms, backed by financial market deepening initiatives. Such policy will be supported by dual intervention and monetary operations strategy to maintain adequate liquidity, particularly in terms of the rupiah money market and foreign exchange market. Bank Indonesia policy to improve the effective availability of cheaper foreign exchange swaps should pique investor interest at auctions of various tenors and lower the swap premium, for instance from 4.85% to 4.62% for 1-month tenors and from 5.18% to 4.96% for 1-year tenors.

Post-Eid price corrections helped Bank Indonesia to control low and stable inflation.  CPI inflation was recorded at 0.28% (mtm) in July 2018, down from 0.59% (mtm) the month earlier in line with milder inflationary pressures after the Eid-ul-Fitr period. Lower headline inflation stems from deflation of administered prices. As of July 2018, therefore, CPI inflation stood at 3.18% (yoy), relatively stable compared with the 3.12% (yoy) posted the month earlier. Administered prices recorded deflation after transport fares experienced corrections in the wake of the high-demand Eid-ul-Fitr period, primarily affecting airfares and intercity fares. On the other hand, inflationary pressures on volatile foods were also controlled amidst price corrections to various food commodities. Meanwhile, low core inflation was maintained despite an accumulation of inflationary pressures on services. Consequently, core inflation was recorded at 0.41% (mtm), up from 0.24% (mtm) the month earlier. The main contributors to core inflation were mobile phone tariffs and the seasonal impact of school fees. Controlled core inflation was also the result of policy consistency from Bank Indonesia in terms of anchoring rational inflation expectations, while maintaining exchange rates in line with the rupiah’s fundamental value. Bank Indonesia predicts inflation within the 2018 target corridor of 3.5±1% (yoy). Furthermore, Bank Indonesia will strengthen policy coordination with the Government to control low and stable inflation.

Financial system stability was maintained in the second quarter of 2018 as the bank intermediation function improved and the banking industry effectively contained credit risk. Maintained financial system stability is reflected in the high Capital Adequacy Ratio (CAR) reported by the banking industry at 22.0% and the liquidity ratio of 19.4% in June 2018. In addition, the banking sector maintained a low level of non performing loans (NPL) at 2.7% (gross) or 1.2% (net). Financial system stability is also contributing to improvements in the bank intermediation function. Deposit growth was reported to accelerate from 6.5% (yoy) to 7.0% (yoy) in June 2018, while credit growth increased from 10.3% (yoy) to 10.7% (yoy). On the other hand, nonbank economic financing through the financial markets, such as initial public offerings (IPO) and rights issues, corporate bonds, medium-term notes (MTN) and Negotiable Certificates of Deposit (NCD), reached a cumulative total of Rp129.9 trillion (gross) in the first half of the year. With the recent economic gains and progress in terms of corporate and banking sector consolidation, Bank Indonesia projects credit and deposit growth in 2018 at 10.0-12.0% (yoy) and 8.0-10.0% (yoy) respectively.

Domestic economic and financial activities are improving with the backing of a secure, efficient, available and reliable payment system. The settlement of noncash transactions, including large-value and retail transactions, as well as cash transactions increased in the reporting period. The daily average value of large noncash payment transactions settled through the Bank Indonesia Real Time Gross Settlement (BI-RTGS) system jumped 13.7% (yoy) in the second quarter of 2018. A similar trend was observed in terms of noncash retail transactions, with the value settled through the National Clearing System (SKNBI) rising 3.1% (yoy) and the value of retail transactions involving ATM/debit cards, credit cards and electronic money expanding 9.6% (yoy). The higher cash payment transaction is also supported by services and system availability of Bank Indonesia’s secured payment system. Regarding cash payments, the position of currency in circulation increased 1.2% (yoy) in the second quarter of 2018 as public demand spiked for currency in appropriate denominations and fit for circulation. Jakarta,

15th August 2018

Executive Director



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