BI 7-Day Reverse Repo Rate Held at 6,00%: Strengthening External Resilience, Maintaining Stability - Bank Sentral Republik Indonesia
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January 16, 2019

No. 20/96/DKom

The BI Board of Governors agreed on 19th and 20th December 2018 to hold the BI 7-Day Reverse Repo Rate at 6.00%, while also maintaining the Deposit Facility (DF) and Lending Facility (LF) rates at 5.25% and 6.75%, respectively. Bank Indonesia believes that the policy rate is still consistent with efforts to reduce the current account deficit and maintain the attractiveness of domestic financial assets with due consideration to global interest rate trends in the next few months. Furthermore, Bank Indonesia will also constantly strengthen coordination with the Government and other relevant authorities to maintain economic stability and strengthen external resilience, which includes reducing the current account deficit to around 2.5% of GDP in 2019.

The global economy is moderating, while financial market uncertainty remains high.  The solid economic gains achieved in the United States during 2018 are expected to consolidate in 2019. The prospect of economic consolidation and financial market uncertainty will slow the pace of Federal Funds Rate (FFR) hikes in 2019 after the US Federal Reserve, as expected, voted to lift the key interest rate on 19th December 2018 by a further 25bps to 2.25-2.5% amid concerns about global growth. In Europe, growth tended to slow, although monetary policy normalisation by the European Central Bank (ECB) in 2019 still demands attention. In China, economic growth continued to moderate on sluggish consumption and net exports due, amongst others, to the ongoing trade war with the United States and financial system deleveraging. Flat global economic growth, coupled with the simmering trade war and widespread geopolitical tensions, have lowered world trade volume (WTV). Consequently, international commodity prices are falling, including the global oil price due to increasing supply from the United States, OPEC and Russia.

National economic growth remains solid on the back of domestic demand. The latest economic indicators point to strong private consumption, backed by maintained public purchasing power and consumer confidence as well as preparations for the elections to be contested in 2019. Investment continues to grow, supported by government infrastructure projects, contrasting slower growth of nonbuilding investment due to the developments unfolding in the manufacturing and mining sectors. Meanwhile, net exports remain negative after export growth decelerated in line with retreating global demand and falling international commodity prices, while imports remained high to satisfy strong domestic demand. Looking ahead, Bank Indonesia projects national economic growth in the 5.0-5.4% range in 2019, buoyed by domestic demand and improvements in terms of net exports.

Indonesia’s trade balance recorded a deficit in November 2018 as a corollary of global dynamics less conducive to growth. The trade deficit stood at USD2.05 billion in the reporting period due to declining export performance on flat global economic growth and sliding prices for Indonesian export commodities. In contrast, imports growth begin slowing down as the government implement import management policy, albeit remain high to meet demand for productive activities, namely investment. Non-resident capital flowing into the domestic financial markets in November 2018 totalled approximately USD7.9 billion, finding its way to all assets, including the stock market and corporate global bonds. The position of reserve assets at the end of November 2018 remained solid at USD117.2 billion, equivalent to 6.5 months of imports or 6.3 months of imports and servicing government external debt, which is well above the international standard of three months. Bank Indonesia will continue to strengthen coordination with the Government to bolster external sector resilience, including the trade balance, thus reducing the current account deficit to around 2.5% of GDP in 2019.

The Rupiah moved consistently with prevailing market mechanisms, thereby supporting external sector rebalancing. Point to point, the Rupiah appreciated 6.29% in November 2018 as an influx of foreign capital flowed back into Indonesia as a result of solid domestic economic fundamentals and a slight thawing of trade tensions between the United States and China. In December 2018, the Rupiah was hit by another wave of depreciatory pressures as global economic uncertainty increased and seasonal demand for foreign exchange ticked upwards towards yearend. Bank Indonesia will remain vigilant of global financial market uncertainty and continue to implement exchange rate stabilisation measures in line with the currency’s fundamental value, while maintaining market mechanisms, backed by financial market deepening efforts.

Inflation is low and stable within the 3.5±1% target corridor for 2018. CPI inflation stood at 0.27% (mtm) in November 2018, or 3.23% (yoy), relatively unchanged from the 0.28% (mtm) and 3.16% (yoy) recorded the month earlier. Inflation was kept under control with the help of minimal core inflation pressures, relatively stable at 3.03% (yoy) in the reporting period and supported by policy consistency by Bank Indonesia to anchor rational inflation expectations, including managing exchange rate movements in line with the currency’s fundamental value. Furthermore, price pressures on volatile foods (VF) were lower than the historical average, alleviated by adequate supply and lower international food prices. Moving forward, Bank Indonesia will consistently maintain price stability and strengthen policy coordination with the Central Government and Local Administrations to maintain low and stable inflation, which is projected within the inflation target of 3.5±1% in 2019.

Financial system stability has been maintained as the bank intermediation function improves and the banking industry effectively contains credit risk.  The Capital Adequacy Ratio (CAR) of the banking industry was reported at 22.9% and the liquidity ratio at 19.2% in October 2018. In addition, the banking sector maintained a low level of non-performing loans (NPL) at 2.6% (gross) or 1.2% (net). In terms of the intermediation function, credit growth was reported to accelerate from 12.7% (yoy) in September 2018 to 13.3% (yoy) in October 2018, while deposit growth increased from 6.6% (yoy) to 7.6% (yoy). On the other hand, 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 Rp178.9 trillion (gross) as of October 2018, which is below the Rp231.6 trillion (gross) recorded in the same period last year. Consequently, Bank Indonesia projects credit growth in 2019 at 10-12% (yoy), while predicting deposit growth in the 8-10% (yoy) range. Bank Indonesia will continue to monitor liquidity adequacy and distribution in the banking system in conjunction with the other relevant authorities consistent with efforts to help maintain financial system stability.

Solid domestic economic performance is backed by uninterrupted cash and noncash payment systems. In terms of cash payments, the position of currency in circulation increased by 7.3% (yoy) in November 2018 to meet the seasonal spike in demand during the Christmas and New Year holiday season. Regarding wholesale noncash payments, the average daily growth of high-value transactions settled through the Bank Indonesia – Real Time Gross Settlement (BI-RTGS) system declined by 1.7% (yoy) in November 2018. Meanwhile, noncash transaction value settled through the National Clearing System (SKNBI) grew by 9.7% (yoy) in November 2018, up from 6.7% (yoy) in the previous period. Retail transactions through ATM, debit and credit cards as well as e-money grew 13.2% (yoy) in October 2018. Bank Indonesia will continue to ensure the exceptional operational availability of the payment systems operated by Bank Indonesia and the industry, thus safeguarding the security and reliability of the payment system towards end of year.

Jakarta, 20th December 2018
COMMUNICATION DEPARTMENT


Agusman
Executive Director

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