JAKARTA (TheInsiderStories) - Bank Indonesia Board of Governors Meeting on 19-20 October 2016 decided to lower the BI 7-day Reverse Repo Rate (BI 7-day RR Rate) by 25 bps from 5.00% to 4.75%, with interest rates Deposit Facility dropped by 25 bps to 4.00% and Lending Facility fell by 25 bps to 5.50%, effective from October 21, 2016, said the executive director Tirta Segara.
Bank Indonesia believes that the easing of monetary policy is in line with the subdued levels of macroeconomic stability, especially inflation in 2016 is expected to approach the lower limit of the target range, the current account deficit a better-than-expected balance of payments surplus is larger, and the exchange rate relatively stable.
In the midst of the still weak global economy, monetary policy easing is believed to further strengthen efforts to boost domestic demand, including demand for credit, so that it can continue to encourage the economic growth momentum.
Bank Indonesia will continue to strengthen policy coordination with the Government to ensure control of inflation, the strengthening of growth stimulus, and the implementation of structural reforms goes well, be able to support sustainable economic growth.
The global economic recovery is still slow and uneven. The US economy is expected to grow less than previously projected, while Europe and India is expected to grow higher than previous estimates.
The forecast US economic growth was reflected in lower consumption indicator is not solid and the estimated investment is still contracting. Correspondingly, the Fed Funds Rate (FFR) is expected to rise only once in 2016.The improved European employment condition has pushed up consumer income.
On the other hand, the consumption in India is expected to increase supported by rising incomes. In the commodity markets, world oil prices are still at a low level, in line with the high OPEC oil production. Meanwhile, the majority of Indonesia’s export commodity prices have improved, such as coal, crude palm oil and some minerals.
Indonesia’s economic growth in the third quarter of 2016 are likely not as strong as previously expected. Consumption indicated improved, though still limited. On the other hand, improvement of private investment, particularly non-construction, estimated to still strong, in line with an installed capacity is still quite large.
Meanwhile, fiscal stimulus is 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 improvements in real exports are still stuck, although prices for some export commodities began to improve.
With these developments, the overall economic growth for 2016 is estimated to tend to approach the lower limit of the range of 4.9 to 5.3% (yoy), Bank Indonsia said.
Indonesia’s balance of payments is expected to record an wider surplus with the current account deficit is lower. For the entire third quarter of 2016, the current account deficit is estimated to be below 2% of GDP, mainly supported by the trade surplus in line with the improvement in the price of primary commodities and a decline in non-oil imports.
Indonesia’s trade balance posted a surplus of US$2.09 billion, an increase compared with the second quarter 2016 surplus amounted to US$1.92 billion. On the other hand, foreign portfolio inflows into Indonesia’s financial markets until September 2016 has reached US$12.1 billion, higher than the inflow of foreign portfolio for the entire 2015.
With these developments, the position of Indonesia’s foreign exchange reserves end of September 2016 stood at US$115.7 billion or the equivalent of 8.9 months of imports or 8.5 months of imports and government foreign debt payments. The figure is above the standard international adequacy approximately 3 months of imports.
Rupiah remained stable with a tendency to strengthen. The rupiah exchange rate in September 2016, on average, has appreciated by 0.41% and reached the level of Rp 13.110 per US dollar. The strengthening continued and by the third week in October 2016 closed at Rp 13,005 per US dollar.
On the domestic front, the strengthening of the rupiah is supported by the positive sentiment in the domestic economy, in line with the conditions of macroeconomic stability is maintained and the implementation of the Law on Tax Forgiveness is going well.
From the external side, the rupiah appreciation associated with the easing of global risk, in line with the easing sentiment associated timing FFR rise in September 2016. Looking ahead, Bank Indonesia will maintain the stability of the exchange rate in accordance with its fundamental value.
Inflation remained under control at a low level and at the end of the year is expected to be at the lower limit of the inflation target range in 2016, which is 4 ± 1%. Consumer Price Index (CPI) in September 2016 recorded inflation of 0.22% (mtm). Inflation is quite restrained and in accordance with the historical trend.
With these developments, CPI inflation in year-to-date (ytd) and annual (yoy) respectively reached 1.97% (ytd) and 3.07% (yoy). Core inflation remained stable, which stood at 3.21% (yoy), in line with weak domestic demand, the trend of declining prices of goods input from global industry, and relatively stable exchange rate. On the other hand, volatile foods (VF) recorded a deflation of 0.09% (mtm) mainly from the correction of the price of some food commodities.
The financial system remained stable with the resilience of the banking system is maintained. In August 2016, the capital adequacy ratio (Capital Adequacy Ratio / CAR) stood at 23.0% and liquidity ratio (AL / DPK) stood at 21.1%. Meanwhile, the NPL (Non Performing Loan / NPL) stood at 3.2% (gross) or 1.5% (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 in line with weak demand, including demand from corporate investments are not yet strong.
Credit growth in August 2016 stood at 6.8% (yoy), lower than the previous month’s growth of 7.7% (yoy). Meanwhile, economic financing through the capital market, such as the issuance of shares, bonds and medium term notes (MTN), has increased.
Furthermore, the growth of third party funds (DPK) in August 2016 stood at 5.6% (yoy), down compared to growth in the previous month. Bank Indonesia believes easing monetary policy and macroprudential policy easing has been done can boost credit growth to sustain higher economic growth ahead. (*)