JAKARTA - Board of Governors of Bank Indonesia (BI) decided to lower the BI 7-day Reverse Repo Rate (BI 7-day RR Rate) by 25 bps from 5.25 percent to 5.00 percent, with interest rates on deposits Facility fell by 25 bps to 4.25 percent and Lending Facility fell by 25 bps to 5.75 percent, effective from 23 September 2016.
The easing of monetary policy through the seven-day reduction in the BI Rate RR is in line with continued macroeconomic stability, which is reflected of low inflation, the current account deficit is under control, and the exchange rate relatively stable. In the midst of the still weak global economy, monetary policy easing is expected to further strengthen efforts to boost domestic demand to continue to drive the momentum of economic growth while maintaining macroeconomic stability.
BI believes that the easing of monetary policy will reinforce the policy instituted by the government to boost sustainable economic growth by accelerating the implementation of structural reforms. Bank Indonesia also continues to coordinate with the Government preparing policy measures so that implementation of Forgiveness Tax Act (Tax Amnesty) can affect optimal for the national economy.
The global economy has potential to be lower than previous estimates accompanied by a decrease in the volume of world trade is significant. US economic growth in 2016 is estimated to be lower than expected, due to weak investment.
Weak US economic recovery and continued high uncertainty overshadowing the US economy resulted in the retention of US policy interest rates or the Fed Funds Rate (FFR) and is expected to rise only once in 2016. Meanwhile, weak investment activity and consumption in Europe, the Europe’s slow economic growth.
The potential of China’s economic slowdown was also experienced due to the slowdown of investment, government spending, and weak consumption. In the commodity markets, oil prices declined, in line with the continued increase in OPEC oil production. Meanwhile, prices for some commodities Indonesia exports improved slightly, especially CPO.
Indonesia’s economic growth in 2016 third quarter is still well preserved, although not as strong as previously expected. Various indicators point Household consumption is still quite strong, as indicated by non-construction investment has not shown significant improvement. Private investment is estimated to still strong, in line with the consolidation carried out by the corporate sector as a response to requests that have not fully recovered.
Meanwhile, fiscal stimulus expected to remain limited, in line with the adjustment of government spending in the second half of 2016. On the external side, the weak economy and world trade resulted in improved exports are still stuck, although the price of some commodity exports began to show improvement.
Bank Indonesia sees the various steps are still needed to boost domestic demand to continue to strengthen the momentum of economic growth. With these developments, the overall economic growth for 2016 is estimated to be in the range of 4.9 percent to 5.3 percent (yoy).
Indonesia’s trade balance recorded a surplus back in August 2016, mainly supported by non-oil trade balance surplus. The trade surplus stood at US$0.29 billion, lower than the surplus in July 2016 amounted to $0.51 billion.
Lower surplus was driven by a decline in non-oil trade balance surplus and rising oil trade deficit. The decline in non-oil trade balance surplus, among other things, driven by an increase in imports of raw materials and imports of capital goods such as machinery and mechanical equipment, machinery and electrical equipment, as well as plastic and plastic goods.
This gives an indication of the improvement in domestic economic activity. On the other hand, inflows of foreign capital into the financial markets until August 2016 Indonesia has reached 11.1 billion US dollars, higher than the inflow of foreign capital for the whole of 2015.
With these developments, the position of Indonesia’s foreign exchange reserves stood at the end of August 2016 US $ 113.5 billion, or the equivalent of 8.7 months of imports or 8.3 months of imports and government foreign debt payments. The figure is above the standard international adequacy approximately 3 months of imports.
The rupiah weakened limited to August 2016, but rebounded in September 2016. The rupiah in August 2016, on average, depreciated by 0.39 percent and reached the level of USD 13 163 per US dollar. The weakening of the exchange rate is more influenced by external sentiments associated timing FFR rise after FOMC minutes of July 2016.
However, in mid September 2016 the exchange rate rebounded by 0.8 percent. The strengthening driven by increased capital inflows, along with the associated timing sentiment eased FFR rise in September 2016 and the continued implementation of the Law on Tax Forgiveness. Looking ahead, Bank Indonesia will maintain the stability of the exchange rate in accordance with its fundamental value.
Inflation is at a low level and is expected to be in the range of the inflation target in 2016, which is 4 ± 1 percent. Price pressures eased after the Eid and deflation of 0.02 percent (mtm) in August 2016. Deflation is lower than the price development in the post Eid in the last five years, which is usually still recorded inflation.
With these developments, CPI inflation in year-to-date (ytd) and annual (yoy) respectively reached 1.74 percent (ytd) and 2.79 percent (yoy). CPI deflation in August 2016 came mainly from deflation of volatile food components and the component of administered prices, along with the price correction after the Idul Fitri.
Volatile food group recorded a deflation of 0.80 percent (mtm) or yearly basis recorded inflation of 5.28 percent (yoy). The monthly price declines mainly from the price correction in some food commodities. AP group recorded a deflation of 0.52 percent (mtm) or 0.91 percent (yoy), driven by a correction in the inter-city transport fares, air freight, and rail.
Meanwhile, core inflation has been relatively low at 0.36 percent (mtm) or 3.32 percent (yoy), in line with domestic demand still limited, controlled inflation expectations and a relatively stable exchange rate. With these developments, inflation is expected to approach the lower limit of the inflation target range in 2016.
The financial system remained stable with the resilience of the banking system is maintained. In July 2016, the Capital Adequacy Ratio (CAR) stood at 22.9 percent and liquidity ratio stood at 20.8 percen. Meanwhile, the Non Performing Loan (NPL) increased to 3.2 percent (gross) or 1.5 percent (net).
Transmission easing of monetary policy through interest rates persist, reflected the continued decline in deposit rates and lending rates. However, transmission through the credit channel is not optimal, seen credit growth is still limited. Credit growth in July 2016 stood at 7.7 percent (yoy), lower than the previous month’s growth of 8.9 percent (yoy).
Meanwhile, the growth of third party funds (DPK) in July 2016 stood at 5.9% (yoy), relatively stable compared with the previous month of growth. Bank Indonesia believes easing monetary and macroprudential policy that has been done can boost credit growth to boost economic growth in the future.