JAKARTA (TheInsiderStories) – Indonesian Central Bank (BI) cut its BI-7 Days Reverse Repo Rate by 25 basis point (bps), from 4.75 percent to 4.5 percent after it leaves the anchor rate unchanged since last October 2016. The Bank also lowered Deposit and Lending Facility to 3.75 percent and 5.25 percent effective August, 23.
Central Bank Governor Agus Martowardojo, said that the decision making following moderate inflation expectation and it’s expected to boost the economic growth. As the end of July, the inflation stood at 2.6 percent or 3.8 percent on annual basis. He believes inflation will be around 4 percent at the end of 2017.
“Meanwhile domestic economy continues to recover, boosted by investment. We see inflation will be slightly below expectation following weak demand and better organized volatile food price,” he said at the press conference on Tuesday (22/8).
Board of Governors expects the decision will be followed by a lowering of interest rates on other monetary instruments. Furthermore, the decision was consistent with the rooms for monetary policy easing, as evidenced by low inflation with 2017 and 2018 inflation projected within the target range and current account deficit under control within a healthy range.
From external side, relating to the Fed hiking its Fed Funds Rate and unwinding its balance sheet, have decreased, resulting in the still-attractive domestic interest rate in Indonesia, compared to the external interest rate. The policy rate easing is expected to reinforce intermediation in the banking sector, to strengthen financial system stability as well as support higher economic growth.
BI constantly strengthens its mix of monetary, macro-prudential and payment system policy to maintain macroeconomic and financial system stability. He said, BI also will continue to strengthen coordination with the Government and other authorities to ensure that inflation control, growth stimulus, and structural reforms are going well enough to support sustainable economic growth.
On the banking sector, He expects credit growth lowering to around 8-10 percent this year. The central bank sees bank intermediation will hike next year, while banking consolidation is expected to be over. The central bank currently works with financial service authority to accelerate consolidation process in the banking sectors. The banking sector is expected to aggressively cut credit rate and push credit supply.
On one hand, solid consumption and expanding exports are driving China’s economy. In Europe, stronger economic growth is expected on the back of increased consumption and exports performance. On the other hand, the flagging US economy is consistent with weaker consumption and investment, subdued by the oil price outlook.
The developments in global economy could prompt an increase in world trade volume, while international commodity prices are set to remain high. Meanwhile, the Fed is estimated to raise the Fed Rate once at the end of 2017 while the U.S balance sheet normalization expected to be announced in September 2017.
Meanwhile, national economic growth stood at 5.01 percent (y/y) in the second quarter of 2017, lower than that of the same period last year of 5.18 percent year-on-year. The growth was supported by investment gains, particularly building investment in line with acceleration on government infrastructure expenditure and increasing on private investment projects.
On the other hand, household consumption growth during the second quarter slowed, while government consumption contracted after spending was delayed. Externally, exports posted slower growth due to the tepid global economic recovery, which triggered a decline in manufacturing export volume.
Spatially, slow exports were mainly reported in the islands of Java, Sulawesi, and Kalimantan, resulting in slower growth in the areas. Moving forward, economic growth is expected to improve on the back of increased investment and consumption activities, in line with more expansive government spending and additional rooms to ease monetary policy. Bank Indonesia predicts growth in the 5.0 to 5.4 percent range for 2017 and 5.1 to 5.5 percent range for 2018.
Indonesia’s balance of payments (BOP) recorded a surplus, while current account deficit remains well maintained and financed by a large surplus in the capital and financial account. In the second quarter of 2017, the BOP recorded $0.7 billion surplus, supported by the $5.9 billion surplus in the capital and financial account, well over the current account deficit of $5.0 billion (1.96 percent of GDP).
The position of reserve assets at the end of July 2017 was recorded at $127.8 billion, equivalent to 9.0 months of imports or 8.7 months of imports and servicing government external debt, which is well above the international adequacy standard of three months. Moving forward, the BOP performance is expected to remain in surplus throughout 2017 and 2018. Current account deficit is expected to remain within a healthy range of under 3 percent of GDP, namely 1.5 to 2.0 percent of GDP in 2017 and 2.0 to 2.5 percent in 2018.
BI said the rupiah remained relatively stable, supported by high confident in Indonesia’s macroeconomic stability.The rupiah appreciated by an average of 0.30 percent to Rp13,309 per U.S dollar in the second quarter of 2017. Rupiah exchange rate stability was supported by the influx of foreign capital along with the prospect of positive returns, followed by the abundant supply of corporate foreign exchange on the domestic forex market.
Looking ahead, Rupiah exchange rate is expected to remain stable, supported by maintained trade balance and deeper domestic forex market. Bank Indonesia shall continue to conduct exchange rate stabilization measures in line with the currency’s fundamental value while maintaining market mechanisms.
Moving forward, inflation is expected to remain low within the target, on the back of adequate supply compared to demand (output discrepancy), stable exchange rate, the global trend of decreased inflation, and low risk in administered prices hike. Bank Indonesia will continue to strengthen coordination with the central government and regional administrations to maintain stable and low inflation.
Banking industry resilience and stable financial markets continued to strengthen financial system stability. In June 2017, the Capital Adequacy Ratio (CAR) of the banking industry was recorded at 22.5 percent and the liquidity ratio at 21.2 percent. Meanwhile, non-performing loans stood at 3.0 percent (gross) or 1.4 percent (net).
The banking industry confirmed that deposit growth decelerated from 11.2 percent (y/y) in May 2017 to 10.3 percent (y/y) in June 2017, while loan growth slowed from 8.7 percent (y/y) in May 2017 to 7.8 percent (y/y) in June 2017. At the end of 2017, deposit growth is expected to be in the range of 9 to 11 percent, while credit growth is estimated to be lower than previously expected, in the range of 8 to 10 percent.
Banking intermediation is expected to improve in 2018 with credit and deposit growth expected at 10 to 12 percent and 9 to 11 percent, respectively. To support economic funding as well as financial market deepening, BI with related authorities will speed up consolidation process in the banking sector while promoting credit distribution and corporate funding through financial markets. The policy, along with policy rate easing, is aimed at boosting an optimum banking intermediation to support national economic recovery.
An economist from state-owned lender PT Bank Mandiri Tbk, Andri Asmoro commenting the central bank relaxation on BI 7 Days Rate will effectively transmit into banking’s credit rate easing in the next 6 months. While for the third party fund rate, it should be affected in the next three years.
“The key for higher credit growth is government spending disbursement in the 2H, the government should boost spending to trigger credit demand. Because on the supply side bank still focus on asset quality by reducing non-performing loan. From its historical pattern in the last three years, I see credit growth will reach below 9 percent this year,” he said.
Meanwhile, Josua Pardede, Economist from private lender PT Bank Permata Tbk see the central bank has the balls to lure interest rate because of external balance getting better. As end of July, balance of payment recorded $0.7 billion surplus as financial transaction booked $5.9 billion surplus, more than $5billion deficit of current account (1.96 percent of GDP).
In addition, core inflation that reflects domestic demand reaches 3.05 percent in July, lower than average core inflation in the last three year of fast month period, which is reflected not good domestic demand condition.
Eric Sugandi, Economist from SIGC see there is no more room in the rest year for monetary easing as central banks concern more on the Fed’s balance sheet shrink plan. He expects BI 7-Day Repo will be tightened by 50 basis point anticipating Fed Rate hike and domestic risk factor as next year Indonesia is in the preparation process for next national selection. (YW)