Bank Indonesia keeps rates steady; trims growth forecast | Outlook data
(Insider Stories)-Bank Indonesia trimmed its growth forecast for 2013 and forecast inflation to ease slightly following measures to ease food supply disruptions and once harvest season arrives, while keeping its benchmark rate unchanged.
BI kept its benchmark rate unchanged at 5.75%, in line with market expectations and marking the 13th straight meeting it has kept the reference rate steady. It also kept the overnight deposit facility rate (Fasbi) unchanged, although some market watchers expect this to rise soon to support a slumping rupiah.
BI cut its growth forecast to between 6.2%-6.6% for this year from 6.3%-6.8% previously expected, citing a global economy that is recovering more slowly than previously thought, even as domestic consumption continues to drive the local economy.
Headline inflation in March was 5.9% year-on-year, outstripping BI’s target range of 3.5%-5.5%. Inflation has been driven by restrictions on horticulture imports that the government imposed last May.
It said January-February exports were “quite disappointing,” and that a recovery expected in the second half of the year might now be delayed.
The following is some analysis of the BI meeting by PT Bank Danamon, one of Indonesia’s largest banks.
BI Rate: stay, cautious on inflation
By Dian Ayu Yustina & Anton H. Gunawan
April 11, 2013
Concern on the global economy, while cautious on the inflation
· Bank Indonesia today (Apr 11th) maintain the policy rate (i.e. BI rate) at 5.75%, while the O/N deposit facility (previously known as FASBI) rate remained unchanged at 4%. The decision is in line with our forecast and the market expectation.
· BI responded to the recent inflation pressure by stepping up the monetary operation by absorbing liquidity to a longer term tenors. By this we think that BI gave signals to reduce recent pressure on inflation by shifting funds to a longer term that may also eventually lead to a more stabilize rupiah.
· Recent inflation pressure is expected to be short lived and will dissipate in the coming months, as recent jump on inflation was mostly due to the strict implementation of horticulture import policy. Moreover, the beginning of harvesting season will also help the food price to decline. Thus policy coordination with the government becomes an essential point here.
· However BI maintained cautious on rising inflation risks particularly with the upcoming fuel subsidy reduction policy and will adjust the monetary policy accordingly. The government may issue a fuel subsidy reduction policy soon, which may lean more towards a consumption limitation policy (i.e. limiting the consumption of private cars) instead of a price hike. This policy would also bring impact on the inflation rate though may not be as large as a fuel price hike.
· Meanwhile BI is less optimistic on the global economic development. Recovery in the USand Euro is still stalled, while the Asian countries performed better. This brings the consequence to a stalled export performance as external demand remained weak with no encouraging signs in the commodity prices.
· With this consideration, BI has revised down growth forecast for Indonesia this year to 6.2-6.6% (from previously 6.3-6.8%). Second quarter growth is expected to be stable at 6.2%yoy. BI has also revised down growth for 2014 at 6.6-7.0% (from previously 6.7-7.2%).
· Balance of payment in Q2 is expected to improve (lower deficit), as capital inflows will improve, especially with the recent success in selling global bonds. However the current account deficit will still be higher due to rising consumption of subsidized fuel. This means the government should immediately come up with the policy to reduce the impact of rising fuel consumption to the current account deficit as well as budget deficit. Worsening current account will bring additional pressure to the currency. However pressure on the rupiah has somewhat eased (currently at Rp9690/USD), with BI maintained presence in the forex market. Foreign exchange reserve in March was at US$104.8 bn, a milder decline compared to previous month. Forex reserve will also be higher next month with the additional USD3bn global bond issuance.
· Credit growth in February was higher at 23.4%yoy driven by the strong growth in working capital (24.5%) and investment credit (25.4%). Consumption credit is stable at 20.3%.
Policy and Market Implications
· Recent pressure on inflation may be temporary, and should recede once the government is able to solve the clog in horticulture imports. However caution is still there with the potential pressure from the upcoming fuel subsidy policy. Having said that, BI may raise rate if the inflation impact exceeds the central bank’s target. But for now we still expect the BI rate to remain at 5.75% by year end.
· Based on our calculation, if no fuel subsidy policy is implemented this year, the fiscal deficit could breach around 2.5% of GDP (central government only) as some of the macroeconomic assumption deviates. With additional approx. 0.5% of regional government deficit, the fiscal deficit could breach slightly below 3%. Fuel consumption limitation policy will certainly help to contain the fiscal deficit not to exceed the 3% threshold.
· Our inflation forecast currently is at 5.47% by year-end (assuming there is no fuel price hike). We also have a 6.2% scenario if the fuel price is raised by 11%, though we think this option is getting less likely. If the consumption limitation policy is implemented, we think that the impact will not be as large as the fuel price hike option. Based on our calculation, every 1 mn KL shift of consumption (from subsidized fuel to non subsidized fuel) could generate additional 0.14% to inflation. However, if the implementation of fuel limitation policy managed to shift at least 25% of subsidized fuel users to using non subsidized fuel, the inflation rate could increase by 0.5-0.7%, which could bring the inflation close to 6%.
· The recently higher than expected inflation caused a slight correction to the bond market. Bond yield has risen by around 24bps to 5.57% (10-yr benchmark) compared to end of February. In the last bond auction, the government absorbed Rp4.5tn, failed to meet its issuance target of Rp7tn as investors asked for higher yields. However, BI maintained its presence in the bond market as well as in the forex market. Thus, we still maintain our view that the rupiah could strengthen to Rp9502/USD by year end, though there might be pressure in the May-June period due to the higher demand for dividend payment.
