Bank Indonesia (BI), which cut its rate by 25 basis points in February, added that inflation in July was lower than the historical norm during the last four years of Ramadan and repeated that it still expects to achieve its inflation target of 4.0 percent, plus/minus 1 percentage point, helped by central and local measures to control inflation.
Indonesia's headline inflation rate was steady at 7.26 percent in July from June while core inflation eased to 4.86 percent from 5.04 percent, a level the BI said was low in comparison to its historical trend and in line with anchored inflation expectations and economic moderation.
The BI's decision to maintain its rates, including the BI rate at 7.50 percent, was widely expected and follows a statement by Deputy Governor Perry Warjiyo on Aug. 4 that the central bank doesn't expect to lower its rates in the near future as this would be counterproductive given the risks to the rupiah and abundant liquidity in the banking sector.
The rupiah has been depreciating since April 2014 but the pace of its decline picked up last week, triggering a statement by the BI on Aug. 12 in which it said the rupiah was undervalued and the central bank would "continue to intervene on the foreign exchange market in order to stabilize the rupiah."
The BI said today that the "rupiah depreciated primarily on the back of external sentiment" falling by 2.47 percent in the second quarter against the U.S. dollar as pressure on its "escalated due to investor anticipation of the proposed FFR hike in the United States along with quantitative easing implemented by the ECB and the ongoing fiscal negotiations in Greece."
In addition, demand for foreign currency to service debt and disburse seasonal dividend payments had "surged" during the second quarter with some of that offset by positive sentiment from S&P's affirmation of a decision to raise Indonesia's outlook to positive from stable and a trade surplus.
The rupiah was quoted at 13,801.7 to the dollar today, down almost 10 percent this year.
Bank Indonesia issued the following statement:
"The BI Board of Governors decided on 18th August 2015 to hold the BI Rate at 7.50%, while maintaining the Deposit Facility rate at 5.50% and the Lending Facility rate at 8.00%. The decision is consonant with efforts to control inflation within the target corridor of 4±1% in 2015 and 2016. In the short term, Bank Indonesia is focused on efforts to stabilize the Rupiah amid uncertainty in the global economy, by optimizing monetary operations in the Rupiah and foreign exchange market. Bank Indonesia constantly strengthens its monetary and macroprudential policy mix in order to ensure macroeconomic stability, particularly exchange rate and financial system stability to bolster economic sustainability. In addition, Bank Indonesia nurtures sound policy coordination with the Government to expedite pro-growth fiscal stimuli and continues various key structural policies to improve the economic outlook of Indonesia.
Global growth remained lower than previously projected amidst widespread uncertainty disrupting global financial markets. The global slowdown stemmed from weaker-than-expected growth in the United States coupled with economic moderation in China. Despite the optimistic outlook relayed at the FOMC in July 2015, the US economy is not expected to attain earlier projections for 2015 due to relatively sluggish Q1 and Q2 actuals combined with weak non-residential investment. Consequently, uncertainty regarding the expected FFR hike in the United States endured. Conversely, the economy of Europe was projected to rally on strong domestic demand as unemployment fell. Additionally, distress in Greece also dissipated after bailout conditions were finally agreed. In contrast, economic moderation persisted in China due to the ongoing stock market crisis, with the People’s Bank of China devaluing the yuan to prop up exports and moving towards a market-driven exchange rate, which also exacerbated currency risk in China’s trading partners, including Indonesia. Furthermore, the torpid global economy perpetuated sliding international commodity prices. On the other hand, uncertainty over the anticipated FFR hike in the United States and China’s exchange rate policy were symptomatic of intense risks lingering on global financial markets.
On the home front, domestic growth slowed in the second quarter but is projected to rebound in the second semester. Q2/2015 growth was recorded at 4.67% (yoy), down from 4.72% (yoy) last quarter. The government was less inclined to consume and invest due to slower-than-expected absorption of government spending, including infrastructure project realisation, congruous with the reorganisation at several government ministries/agencies, which led to weaker domestic growth. Furthermore, the wait-and-see attitude of private investors further compounded the slump in construction investment. Externally, limited export growth was reported in line with the protracted global recovery and soft commodity prices. Regionally, domestic economic moderation was most pronounced on the islands of Sumatra and Kalimantan, with a number of oil and gas rich provinces experiencing negative growth, including Riau, East Kalimantan and Aceh.
A smaller current account deficit was indicative of sounder performance. The current account deficit was recorded at US$4.5 billion (2.1% of GDP) in Q2/2015, shrinking from US$9.6 billion (4.3% of GDP) in the same period a year earlier. Performance was buoyed by a stronger non-oil and gas trade balance due to a dramatic decline in non-oil and gas imports as domestic demand ebbed. Meanwhile, despite a contraction in non-oil and gas exports (-5.3%, yoy), real non-oil and gas shipments rallied as export volume expanded 7.7% (yoy). Indonesia’s trade surplus improved to US$1,33 billionin July 2015, while the capital and financial account also continued to record a surplus despite ubiquitous uncertainty blighting global financial markets. Notwithstanding, the capital and financial account surplus was smaller than that recorded in the same period last year due primarily to declining portfolio investment and a deficit of other investments. Consequently, the position of foreign exchange reserve assets at the end of July 2015 was US$107.6 billion, equivalent to 7.0 months of imports or 6.8 months of imports and servicing public external debt, which is well above the international adequacy standard of three months.
The rupiah depreciated primarily on the back of external sentiment. The rupiah fell by an average of 2.47% (qtq) to a level of Rp13,131 per US dollar in Q2/2015. Pressures on the currency escalated due to investor anticipation of the proposed FFR hike in the United States along with quantitative easing implemented by the ECB and the ongoing fiscal negotiations in Greece. Domestically, demand surged for foreign currencies in order to service debt and disburse seasonal dividend payments during the second quarter of 2015. Pressures were offset, however, by positive sentiment stemming from S&P’s affirmation to raise Indonesia’s outlook rating from stable to positive together with a growing trade surplus. The latest developments have shown that, in line with the market reaction to yuan devaluation in China, nearly all global currencies, including the rupiah, experienced depreciatory pressures (overshoot). Consequently, the rupiah overshot, which left the currency undervalued. Addressing such conditions, Bank Indonesia has and will continue to intervene on the market in order to stabilise the rupiah in accordance with its fundamental value, thereby supporting macroeconomic and financial system stability.
Inflation over the Eid-ul-Fitr period in 2015 was successfully controlled at a rate below the historical average for the past four years. Furthermore, core and volatile food inflation were also maintained at low levels. CPI inflation was recorded at 0.93% (mtm) in July 2015 or 7.26% (yoy) on an annualised basis. Therefore, headline inflation for 2015 through to July was low at just 1.9% (ytd). In addition, core inflation was recorded at just 0.34% (mtm) or 4.86% (yoy), which is low in comparison to its historical trend in line with anchored inflation expectations and domestic economic moderation. Meanwhile, volatile food inflation was slightly higher than its historical average but controlled at 2.13% (mtm) or 8.97% (yoy). Central and local government efforts to stabilise prices helped control pressures on volatile foods. Based on inflation through to July 2015, Bank Indonesia perceives the inflation target of 4±1% as attainable through policy coordination to control inflation centrally and locally.
Financial system stability remained solid, underpinned by a resilient banking system and relatively stable financial markets. The banking industry was again resilient, with credit, liquidity and market risks well mitigated. The Capital Adequacy Ratio (CAR) remained well above the statutory minimum of 8% at 20.1% in June 2015. Meanwhile, non-performing loans (NPL) were low and stable at 2.6% (gross) or 1.4% (net). In terms of the intermediation function, credit growth was stable at 10.4% (yoy), while deposits grew 12.7% (yoy). Credit growth is forecasted to accelerate in upcoming periods as the economy improves and Bank Indonesia loosens its macroprudential policy stance."
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