Bank Indonesia to Continue Measures in Strengthening the Policy Mix to Curb Inflation, Stabilize Rupiah Exchange Rate, and Cut Current Account Deficit - Bank Sentral Republik Indonesia
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April 18, 2019

No, 15/26/DKom

In the Board of Governors’ Meeting convened on August 29, 2013, Bank Indonesia decided to bolster its continuing policy mix as follows. First, BI raised BI rate by 50 basis points (bps) to 7.00%, the lending facility rate by 25 bps to 7.00% and the deposit facility rate by 50 bps to 5.25%. Second, BI cut down the month-holding-period for Bank Indonesia Certificates (SBI) from 6 months to 1 month. Third, BI took into account Bank Indonesia Deposit Certificates (SDBI) as a component of Secondary Statutory Reserve. Fourth, BI reinforced cooperation among central banks to extend the Bilateral Swap Arrangement (BSA) between BI and Bank of Japan as the agent of Japan Ministry of Finance (MoF). These additional polices would strengthen the various policies mix that have been adopted, including today’s overnight (o/n) foreign exchange Term Deposit and SDBI auction, the expansion of the FX swap as hedging instruments, as well as loan-to-value ratio (LTV) policy of property loans and supervisory action in the management of liquidity and lending.

  1. In response to the recently rapid changes on the global and national economy, The Board of Governors strongly believes it is necessary to deliver an additional monthly Board of Governors’ meeting to have an overall evaluation on the condition of Indonesia macroeconomic, monetary and financial system, which recently has been under mounting pressures in line with the increasing global economic uncertainty and prolonged higher inflation expectations and perceptions on the current account sustainability. In particular, the Board of Governors has highlighted numerous critical developments within economic, monetary, and financial indicators as follows:

    1. The prolonged uncertainty in the tapering of monetary stimulus by the Fed continues to put pressures on the financial markets in various countries. Capital withdrawal combined with increasing risks in investment has led to stock prices decline, rising bond yields, and the weakening exchange rate in nearly all emerging markets, including Indonesia. Stronger pressures on the global financial market come amid the decelerating economic growth in the global world and the Asia region, including China and India as well as the continuing decline in primary commodity prices, except for fuel. These overall unfavorable conditions have put mounting pressures on the performance of Indonesian trade and financial market as well.
    2. Pressures on Indonesia’s balance of payments continue to persist despite decelerating in its intensity. Based on preliminary data in export and import up to July 2013, the current account deficit in the second quarter of 2013 reached 4.4% GDP and is expected to decrease to 3.4% of GDP in the third quarter of 2013. The deficit is mainly derived from oil and gas trade balance resulting from the high oil imports for domestic consumption. In the capital and financial account, surplus is expected to come from foreign capital flows in the form of FDI and portfolio investment, mainly in the form of government securities, amid capital outflows from the stock market investment portfolio. This condition is expected to support improvements in the balance of payments stability and foreign exchange reserves.
    3. CPI inflation, measured on an annual basis (year-on-year), is predicted to remain high. However, measured on a monthly basis (month-to-month), CPI inflation in August will be much lower than last July, and is expected to return to its normal level in September. Overall, taking into account its realization up to July and estimates in the months to come, BI forecasts CPI inflation by the end of 2013 will be in the range of 9.0% - 9.8%. The soaring inflation is mainly affected by volatile foods and administered prices, while core inflation is still relatively under control.
    4. Rupiah depreciation pressures continues to persist, due to either global financial market pressures as suffered by nearly all emerging market countries or domestic factors largely attributable to the high current account deficit and soaring inflation. On August 28, 2013, rupiah closed at Rp 10.945 per U.S. dollar, depreciated by 11.9% in point-to-point basis from the end of December 2012. BI believes that today’s exchange rate reflects its economic fundamentals to support increased exports and decreased imports in the adjustment process of the current account deficit. Nonetheless, the rupiah exchange rate uncertainty is still relatively high, reflected in its soaring volatility and wide range of trade, partly stemming from the overshooting reaction of market players.
    5. Economic activity shows a decelerating trend resulting from the slowdown of world economic growth. Up to first semester of 2013, Indonesia's economic growth reached 5.9%, a decrease from the 2012 of 6.2%. The downward economic trend is predicted to continue in the second semester of 2013, particularly in the non-construction investment and private consumption. Overall, Bank Indonesia forecasts Indonesia’s economic growth in 2013 will move to the lower bound of the range of 5.8% -6.2%.
    6. Liquidity conditions in the financial market and banking industries is well-maintained. The developments in overnight interbank rates are relatively stable at around 4.8% and there is no significant increase in the volume of lending and borrowing transactions in the financial market. The well-maintained bank liquidity is reflected in the ratio of Liquidity Assets to Deposits which remain large. Resilience of the banking industries remains strong, as reflected in the high capital ratios and low ratio of non-performing loans (NPL). Meanwhile, credit growth tends to decline, stood at 19.6% (yoy) in mid of August 2013, in line with the decelerating of domestic economic activity. In the capital market, government securities yield has increased supported by the higher expected inflation and international interest rates, while the shares price increased again as recorded on the trade of August 28, 2013 after a sharp decline from the position in December 2012 due to the global impact.
  2. Overall, the Board of Governors concurred that the national economic adjustment process to the global economic downturn is showing indications of progress, which is inextricably linked to the ongoing monetary and macro prudential policy mix pursued by Bank Indonesia as well as coordinated policy measures taken in conjunction with the Government and through fora such as Financial System Stability Coordination Forum (FKSSK). Nonetheless, the Board of Governors agreed that global economic pressures and uncertainty will persist looming ahead due to the timeframe and magnitude of monetary stimulus tapering by the Fed, lower commodity prices and weaker global economic growth. Against these unpropitious backdrops, at the Monthly Board of Governors’ Meeting convened today, 29th August 2013, BI decided to introduce supplementary measures to reinforce the monetary and macro prudential policy mix to curb inflation, stabilise rupiah exchange rates, ease the current account deficit as well as strengthen macroeconomic resilience and financial system stability. The package of policy measures are as follows:

    1. Bank Indonesia decided to bolster its continuing policy mix as follows. First, BI raised BI rate by 50 basis points (bps) to 7.00%, the lending facility rate by 25 bps to 7.00% and the deposit facility rate by 50 bps to 5.25%. The BI rate hike aims to to further strengthen control over inflationary expectations and risk mitigation against the possibility of a depreciation-inflation spiral. This policy is also part of efforts to ease the current account deficit back to a sound and sustainable level.
    2. Strengthening the rupiah exchange rate stabilisation in accordance with economic fundamentals. Double intervention through foreign exchange supply and tradable government securities (SBN) purchase in the secondary market will be continued in a measurable fashion. To broaden the diversity of tenors for foreign exchange management, auctions of overnight (o/n) foreign exchange term deposits will commence today, in addition to the previous tenors of 7, 14 and 30 days, to boost foreign exchange supply. To manage demand of foreign exchange by non-residents without undermining prudential aspects of banks engaged in foreign loans, increased VOSTRO account from divestments of direct investment and buyers of Indonesian shares and/or corporate bonds as well as SBN are exempted from the short-term foreign loan requirements for banks totalling a maximum of 30% of capital. This policy will soon apply. The availability of hedging instruments for the banks and business community has been improved through bilateral FX Swap transactions along with regular auctions held each Thursday. Banks can freely pass-on FX Swap transactions to the customers of other banks or Bank Indonesia. BI cut down month-holding-period for Bank Indonesia Certificates (SBI) from 6 months to 1 month.
    3. Strengthening the liquidity management on the financial market and banks to maintain the stability of financial markets, the banking industries as well as the overall financial system. By enhancing the monetary operations through double intervention in the foreign exchange market and foreign exchange purchase in the secondary market as well as through monetary operations in the rupiah financial market, the liquidity in the financial market and banking remained under control. To bolster monetary operations, banking liquidity management, as well as follow-up measures for the financial market deepening, BI will conduct SDBI auction with 1-month and 3-months tenor commencing today. As previously announced, SDBI is a monetary instrument available at Bank Indonesia that can be traded inter banks domestically. In addition, BI also has term-repo instruments with underlying SBI and SBN at its disposal to mitigate the risk of liquidity pressures in the financial market for the banking industries.
    4. Strengthening the macro prudential policy to manage credits and risks. As a follow-up measure to decisions delivered in the previous Board of Governors’ meeting, the Loan-to-Value (LTV) requirement on specific types of mortgage loans will be tightened in the near future. Supervisory actions will also be taken against banks that overextend their credits. To reinforce bank liquidity risk management, BI will improve the LDR reserve requirements and secondary reserve requirements. Bank Indonesia will also take into account Bank Indonesia Deposit Certificates (SDBI) as a component of Secondary Statutory Reserve.
    5. Strengthening coordination among central banks in terms of monetary policy and financial system stability. BI believes the amount of foreign exchange reserves as of now is sufficient to offset pressures in the balance of payments. Notwithstanding, the mounting pressures and global economy uncertainty looming ahead needs anticipative measures by strengthening either the policy mix response or resilience from external shocks, including buttressing the foreign exchange reserves as a second line of defence. For this reason, BI has signed an extension to the Bilateral Swap Agreement (BSA) with the Bank of Japan as the agent of Japan Ministry of Finance (MoF) totalling US$ 12 billion, taking into effect by 31st August 2013. Discussion for similar cooperation is also being carried out with central banks in the region
  3. Bank Indonesia will regularly evaluate the performance of the global economy and its impacts on the national economy, while concomitantly preparing follow-up measures to strengthen the overall instruments required in the monetary and macro prudential policy mix. BI will continuously intensify its cooperation with the Government and the FKSSK to maintain macroeconomic and financial system stability, specifically in terms of inflation control, rupiah exchange rate and financial market stability, current account deficit reduction, balance of payments soundness as well as improving risk management and resilience in the financial sector. These array of various policy measures will lead to the decelerating economic performance in the short term, but it is believed to support the sustainability of the national economy in the medium and long term

Jakarta, 29 August 2013
Communication Department

Difi A. Johansyah
Executive Director

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