Bank Indonesia (BI), which has maintained rates since November 2013, said it remained vigilant of domestic and external risks, including the risk of contagion from the normalization of U.S. monetary policy as well as an adjustment of administered prices, including any changes to subsidized fuel prices.
Indonesia's headline inflation rate rose to a lower-than-expected 4.53 percent in September from 3.99 percent in August while core inflation fell to 4.04 percent from 4.47 percent. BI targets inflation of 4.5 percent, plus/minus one percentage point this year, and 4.0 percent, plus/minus one percentage point, in 2015.
The current account deficit in the second quarter rose to US$ 9.113 billion from $4.151 billion in the first quarter but was down from $ 10.133 billion in the second quarter of 2013.
BI has called on Indonesia's new government to raise fuel prices before March and preferably by the end of this year to ease pressure on the current account.
Earlier this month the central bank forecast that annual economic growth in the third quarter would slow further to 5.02 percent from 5.12 percent in the second quarter as the economic slows in line with the trending global commodity prices.
Bank Indonesia issued the following statement:
"The Board of Governors of Bank Indonesia, convened on 7th October 2014, decided to hold the BI rate at 7.50%, with the Lending Facility and Deposit Facility rates to remain at 7.50% and 5.75%, respectively. Such policy is consistent with efforts to control inflation towards its target corridor of 4.5±1% in 2014 and 4.0±1% in 2015, as well as to reduce the current account deficit to a more sustainable level. Although macroeconomic and financial system stability remain benign, Bank Indonesia maintains vigilance of several risks that emerge from domestic and external, such as contagion risk stemming from the normalization of the Federal Reserve policy as well as possibilities for adjusment of administered prices. To that end, Bank Indonesia will continue to strengthen its monetary and macroprudential policy mix in order to ensure the preserve macroeconomic and financial system stability that supports economic sustainability. Furthermore, Bank Indonesia will also strengthen policy coordination with the government to control inflation and reduce the current account deficit, in order to ensure a smooth economic rebalancing process so that sustainable economic growth could be maintained.
From the global perspective, global economic recovery continues albeit at uneven pace. The US economy continues to expand on the back of increased manufacturing production activity, stronger retail sales figures, growing consumer confidence and improved employment indicators. Congruously, normalization of the Federal Reserve’s monetary policy is expected to commence earlier, namely in the second quarter of 2015, with a potential hike in the federal funds rate exceeding that previously predicted. Such sentiment has resulted in US dollar appreciation coupled with pressures on financial markets in emerging market. On the other hand, the economies of Europe and Japan continue to decelerate, hence encouraging accommodative monetary policy by the corresponding central banks. In addition, slower economic growth is also expected in developing countries. Finally, economic activity in China continues to decelerate, as reflected by indicator of retail, automobile and housing sales data. Moderating demand in developing countries is perpetuating the slump in international commodity prices.
From the domestic perspective, economic growth remains moderate. Despite more robust growth, private consumption has declined in the wake of the 2014 Presidential Election, reflected by slower growth in retail sales indicators. Furthermore, government consumption is yet to rebound in line with seasonal trends due to budget savings implemented to control the fiscal deficit. Even though, there is a positive growth on construction investment by the end of the year, non-construction investment performance slightly weakened along with declining of capital goods import. Although improving, export growth remains lower than projected as international commodity prices slump and trade volume in emerging market countries remains low. Accordingly, imports continue to decline. In general for 2014, growth is predicted at the lower end of the previous projection, namely 5.1-5.5%.
The non-oil/gas trade surplus continued in August 2014, despite contracting in comparison to the preceding month. The smaller non-oil/gas trade surplus was blamed on an increase in non-oil/gas imports that exceeded the increase in non-oil/gas exports. Meanwhile, the oil and gas trade balance improved in August 2014 due to oil and gas export growth, in particular exports of crude oil. In general, the trade balance of Indonesia recorded a deficit of US$0.31 billion in August 2014, subsequent to a US$0.05 billion surplus in the preceding month. Bank Indonesia considers the August 2014 trade balance in accord with projected current account performance during the third quarter of 2014. In terms of the financial account, the positive perception of investors concerning the domestic economic outlook helped maintain the influx of foreign capital. Accumulatively up to September 2014, foreign portfolio inflows to financial markets in Indonesia amounted to US$14.6 billion. Consequently, the foreign exchange reserves of Indonesia totalled US$111.2 billion at the end of September 2014, equivalent to 6.5 months of imports or 6.3 months of imports and servicing foreign debt, which is well in excess of international adequacy standards of around three months of imports..
The rupiah depreciated slightly during September 2014 in line with US dollar appreciation, which placed pressures on nearly all global currencies. On average, the rupiah depreciated 1.57% (mtm) from the previous month to Rp11,898 per US dollar. Point-to-point, the rupiah depreciated 4% and closed at a level of Rp12,185 per US dollar. Fluctuations in the rupiah were congruent with shifts in other currencies in the region, with rupiah deprecation the result of external and domestic sentiment. External factors stemmed from the normalisation policy of the Fed, indications of an economic downswing in China as well as global geopolitical dynamics. Domestically, however, sentiment was linked to the wait-and-see attitude of investors concerning the formation of the new Cabinet as well as future government work programs, including policy related to fuel subsidies. Moving forward, Bank Indonesia will continue to maintain rupiah stability in accordance with its fundamental value.
Inflation declined in September 2014 compared to the preceding month to a level lower than projected. Consumer Price Index (CPI) recorded inflation was 0.27% (mtm), below the 0.47% (mtm) posted in the previous month. In addition to falling below the previous BI projection, inflation in September was lower than the historical average over the past five years as a result of low inflation of volatile foods and controlled core inflation. Furthermore, core inflation remains under control as external pressures ease, domestic demand moderates and inflation expectations are anchored. Notwithstanding, inflationary pressures on administered prices escalated in line with corrections to energy prices, such as electricity rates and 12 kg canisters of LPG. Moving ahead, Bank Indonesia will continue to monitor various inflation risks, particularly those associated with price corrections to subsidised fuel, as well as reinforce coordination with the Government to control inflation at the central and local levels in order to minimise second-round effects and control inflation towards the national target.
Banking system resilience and relatively sound financial market performance bolstered solid financial system stability. The banking industry remained resilient, with credit risk, liquidity risk as well as market risk well mitigated and supported by a strong capital base. In August 2014, the Capital Adequacy Ratio (CAR) was high at 19.23%, well above the minimum threshold of 8%, while non-performing loans (NPL) were low and stable at around 2.00%. Meanwhile, credit growth to the private sector decelerated to 13.4% (yoy) from 15.0% (yoy) in the previous month in line with the ongoing economic rebalancing process. On the other hand, liquidity position of the bank improve as the government adopted expansive financial operations. Such conditions were reflected in M2 and third-party deposit growth, respectively achieving 11.0% (yoy) and 11.6% (yoy) in August 2014. Furthermore, a number of banks began to lower their deposit rates. In addition, the capital market also performed well in September 2014, amid the global financial market pressures. Bank Indonesia will remain vigilant of risks that could threaten financial system stability, including an increase in corporate foreign debt."
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