(Before It's News)
Indonesia's central bank cut is new benchmark interest rate by 25 basis points for the second month in a row to stimulate domestic demand, including credit, to stimulate domestic demand at a time that inflation will remain close to the floor of its target range and economic growth is slightly weaker than expected.
Bank Indonesia (BI) cut its BI 7-day Reverse Repo Rate (BI 7-day RR Rate) to 4.75 percent from 5.0 percent, brining the total cut in that rate to 50 basis points following the cut in September.
BI adopted the 7-day rate as its new benchmark rate in August to improve the transmission of its monetary policy decisions to money markets. Prior to August BI cut its previous benchmark rate, the BI rate, four times from January through June by a total of 100 points.
Indonesia's inflation rate rose to 3.07 percent in September from 2.79 percent in August but BI reiterated that inflation is expected to fall towards the floor of its target corridor of 3 – 5 percent.
Indonesia's economy in the third quarter was slightly weaker than BI had expected and the impact of government spending is now seen as “somewhat limited” as spending is adjusted in the second half of this year.
Sluggish world trade has also undermined the country's exports while the rupiah's exchange rate has continued to appreciate, making the country's exports less competitive.
Economic growth this year is therefore expected to be around the lower end of the 4.9 percent to 5.3 percent range that BI has forecast, a slight downgrade in its forecast.
In August BI cut its growth forecast to 4.9-5.3 percent from a previous 5.0-5.4 percent and last month confirmed that expectation.
Indonesia's Gross Domestic Product grew by an annual rate of 5.18 percent in the second quarter, up from 4.91 percent in the first quarter, but BI said consumption in the third quarter had remained limited and private investment, particularly non-construction investment, had remained weak.
After being hit hard in 2013 – the year of the “taper tantrum” when the rupiah fell by 21 percent – the rupiah continued to depreciate until October 2015.
Since then it has been rising on positive sentiment about the economy along with a tax amnesty that encouraged Indonesians abroad to repatriate funds.
The rupiah was trading at 13,003 to the U.S. dollar today, up 6.1 percent this year.
Bank Indonesia issued the following statement:
“The BI Board of Governors agreed on 19-20th October 2016 to lower the BI 7-day Reverse Repo Rate (BI 7-day RR Rate) 25 basis points (bps) from 5.00% to 4.75%, while also lowering the Deposit and Lending Facility rates 25 bps to 4.00% and 5.50% respectively, effective 21st October 2016. Bank Indonesia believes that the monetary easing is consistent with maintained macroeconomic stability, specifically inflation in 2016 that’s expected to fall near the floor of the target corridor, a better-than-expected current account deficit, bigger trade balance surplus and relatively stable exchange rate. Against a backdrop of global economic moderation, the eased monetary policy is expected to underpin efforts to stimulate domestic demand, including credit, in order to maintain economic growth momentum. Bank Indonesia will continue to coordinate with the government to ensure that inflation control, growth stimulus strenghtening, and implementation of structural reform, are well underway to support sustainable economic growth.
Global economic recovery remains slow and uneven. US growth has been revised downwards, while Europe and India are predicted to outperform previous projections. US growth was corrected on the back of weak consumption along with contractions in the investment sector. In line with that, the Federal Funds Rate (FFR) hike is expected to occur just once in 2016. Europe’s labour market improvements that elevated incomes and spurred consumption led to stronger growth than previously expected. On the other hand, stronger economic growth in India was supported by income gains that drove consumption. On the commodity markets, the global oil price remained low due to high OPEC production, while the prices of several export commodities from Indonesia improved, including coal, crude palm oil (CPO) and metal.
On the home front, domestic economic growth in the third quarter was down slightly from the previous projection. Consumption was indicated to improve but remained limited. On the other hand, private investment, particularly non-construction investment, is estimated to remain weak in line with the large installed production capacity. Meanwhile, Bank Indonesia predicts the impact of fiscal stimuli to remain somewhat limited as the government adjusts spending in the second half of the year. Externally, global economic moderation and sluggish world trade have undermined improvements in the real sector exports, despite several commodity prices starting to rebound. Consequently, Bank Indonesia predicts 2016 economic growth to be around the floor of the 4.9-5.3% (yoy) range.
Indonesia’s balance of payments is expected to record an increase of surplus, with a lower current account deficit. Current account deficit in the third quarter is estimated to fall below 2% of GDP, especially bolstered by trade surplus, in line with the rebound in primary commodity export price, as well as a decline of non-oil and gas imports. Indonesia’s trade balance recorded a surplus of USD2.09 billion in the third quarter, building on the USD1.92 billion posted in the second quarter. On the other hand, non-residents booked a net capital inflow of USD12.1 billion to financial markets in Indonesia, exceeding the overall total for 2015. Consequently, the position of official reserve assets at the end of September 2016 stood at USD115.7 billion, equivalent to 8.9 months of imports or 8.5 months of imports and servicing government external debt, which is well above the international adequacy standard of three months.
The rupiah remained stable with a tendency of appreciating. The rupiah appreciated by an average of 0.41% to a level of Rp13,110 per USD. The appreciation continues and on the third week of October, the Rupiah closed at a level of Rp13,005 per USD. At home, positive sentiment concerning the domestic economy, stemming from maintained macroeconomic stability together with sound implementation of the Tax Amnesty, bolstered rupiah appreciation. Externally, the rupiah appreciated as global risk surrounding the timing of the proposed FFR hike eased. Moving forward, Bank Indonesia will continue to maintain exchange rate stability in line with the rupiah’s fundamental value.
Bank Indonesia expects inflation to remain under control at a low level and, by the end of 2016, to fall towards the floor of the 4±1% target corridor. The Consumer Price Index (CPI) recorded inflation of 0.22% (mtm) in September 2016, which is considered under control and consistent with historical trends. Consequently, CPI inflation stood at 1.97% (ytd) and 3.07% (yoy). Core inflation remained stable at 3.21% (yoy) along with weak domestic demand, a decrease in global commodity price, and a relatively stable Rupiah currency. On the other hand, volatile foods (VF) recorded deflation of 0.09% (mtm) due to price corrections of various food commodities.
Financial system stability was maintained along with banking system resilience. In August 2016, the Capital Adequacy Ratio (CAR) was recorded at 23.0% and the liquidity ratio (liquid assets/deposits) at a level of 21.1%. Meanwhile, non-performing loans (NPL) stood at 3.2% (gross) or 1.5% (net). The looser monetary policy stance is continuously transmitted through the interest rate channel as reflected by lower lending and deposit rates. In contrast, monetary policy transmission through the credit channel remained suboptimal, in line with limited demand, including low investment demand from corporations. Credit growth was recorded at 6.8% (yoy) in August 2016, decelerating from 7.7% (yoy) the month earlier. Meanwhile, financing through capital market, such as stock, bond, and medium term notes (MTN) issuance, increased. On the other hand, deposit growth decelerated to 5.6% (yoy). Bank Indonesia believes that the monetary and macroprudential policy easing will catalyse credit growth in order to stimulate stronger economic growth moving forward.”