JAKARTA (TheInsiderStories) – Bank Indonesia maintained the Seven-Day Reverse Repo Rate (BI-7DRR) at 4.50 percent, the Deposit Facility rate at 3.75 percent, and the Lending Facility rate at 5.25 percent to support the the exchange rate stability amid the uncertainty of global financial markets, said the governor today (05/19).
But, Perry Warjiyo said, the central bank sees room for lower interest rates as inflationary pressure is low and the need to encourage economic growth, especially in 2020. He adds, the Bank also continues to strengthen the policy mix to mitigates the risk of spreading COVID-19, maintaining financial market stability and the financial system synergizing with the government and relevant authorities in accelerating the Economic Recovery Program.
Going forward, he stated, BI will continue to pay close attention to the dynamics of the economy and global financial markets and the spread of COVID-19 and its impact on the Indonesian economy, as well as take further necessary policy steps in close coordination with the financial system stability committee to maintain macroeconomic stability and the financial system, and the economic recovery.
According to Warjiyo, the epidemic has reduced world economic growth, while its influence on the uncertainty of world financial markets began to subside. In line with the spread of the COVID-19 pandemic and accompanied by various efforts to overcome restrictions on community activities, economic growth in the first quarter of 2020 in many countries in the world declined sharply.
Economic growth in China, Europe, Japan, Singapore and the Philippines experienced contraction in the first quarter (1Q) of 2020, while American economic growth fell to 0.3 percent . The development shows that the risk of global economic recession remains give a large contraction in various sectors such as the manufacturing and service as well as consumer and business confidence.
This development also resulted a contraction in world trade volume, followed by falling commodity prices and oil prices. With the projected economic contraction continuing into the 3Q of 2020, Bank Indonesia forecasts the global economy in 2020 recording a negative growth of 2.2 percent.
The world economic growth is predicted will rebound again in 2021 to 5.2 percent driven by the positive impact of policies adopted in many countries and the base effect factor. But, he noted, the uncertainty of global financial markets began to subside.
This condition has slowly led to a reduction in the intensity of capital outflows from developing countries and then followed by reduced exchange rate pressures in developing countries, including Indonesia. The COVID-19 pandemic has also affected domestic economic growth.
The country’ economic growth in the 1Q of 2020 was 2.97 percent compared to last year(YoY), slowing compared to the previous quarter’ at 4.97 percent. The decline mainly from slowing exports especially tourism, non-food consumption, and investment.
The most affected sectors occurring in the trade, hotel, restaurant, manufacturing industry, construction, and transportation sector. While, the performance of components sectors related to handling COVID-19 remained good, as reflected in government consumption and household consumption for health food and education, as well as information and communication sectors, financial services, health services and other services.
The April data indicates that the slowdown in Indonesia’ economic growth continues, as reflected in the re-drop in the Retail Sales Survey and the Purchasing Manager Index. He predicts that this year’ domestic economic growth will decline in line with the impact of COVID-19.
In 2021, economic growth is predicted to rise again driven by an improving world economy and the positive impact of policy stimulus taken by the country. Warjiyo believed, the resilience of Indonesia’ external economic sector was good.
He also reported, the current account deficit in 1Q of 2020 dropped to below 1.5 of GDP from 2.8 of GDP in 4Q of 2019 affected by the decline in imports inline with slowing demand. The central bank forecasts the current account deficit in 2020 to drop to below 2.0 percent of GDP, from an earlier forecast of around 2.5 – 3.0 percent of GDP.
The declining also occurred stock and financial market due to the large capital outflow amid “panic situation” in the global financial market towards the COVID-19 pandemic. Based on BI data, foreign capital inflows began to improve since early April driven by easing global financial market uncertainties, high competitiveness of domestic financial assets, and the favorable outlook for the Indonesian economy.
Portfolio investment from April to May 14 recorded a net inflow of US$4.1 billion, after in the 1Q of 2020 recorded a net outflow of $5.7 billion. The forex reserves also increased to $127.9 billion or equivalent to 7.8 months of import funding or 7.5 months of imports and government foreign debt payments, and was above the international adequacy standard of around three months of imports.
Bank Indonesia assesses that the position of the reserves is more than sufficient to meet the needs of imports and payment of government foreign debt and the need for stabilization of the Rupiah. Until May 18, said the governor, the local currency strengthened 5.1 percent on average and 0.17 percent point to point compared to the end of April.
However, the Rupiah still recorded a depreciation of around 6.52 percent compared to the end of 2019 due to deep depreciation in March. The strengthening of the exchang rate was driven by foreign capital inflows and the large forex supply from domestic players.
In April, inflation remains low at 0.08 percent compared to previous month of 0.10 percent influenced by weak demand. Core inflation also declined due to the consistency of BI in directing inflation expectations on target and slowing domestic demand. With this development, annual inflation in April was recorded at 2.67 percent from last year and lowered compared to last month’ inflation of 2.96 percent.
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