But Bank Indonesia (BI), which cut its rate by 25 basis points in February, added that economic growth in the United States was higher than previously projected, but China's devaluation of its yuan could undermine U.S. exports, which meant that uncertainty concerning the Federal Reserve's increase in the fed funds rate had lingered, "with the increase now expected towards year end."
Later today the Federal Reserve will issue its policy decision, with markets split on whether it will raise the fed funds' rate, held at the current level of 0-0.25 percent since December 2008.
In the near term, Bank Indonesia said its policy will continue to focus on stabilizing the rupiah currency "by optimizing monetary operations," strengthening forex supply and demand management, while continuing to deepen the money market.
BI acknowledged its intervention in the foreign exchange market and attributed recent depreciation of the rupiah from China's devaluation of its yuan combined with uncertainty over the proposed fed fund hike in the U.S..
In addition, a surge in domestic demand for U.S. dollars to service foreign debt had also "exacerbated the rupiah overshoot," BI said.
The rupiah has been depreciating since April 2014 but its decline picked up speed in August, when it fell by an average of 2.9 percent from July, BI said. Today the rupiah was trading at 14,481 to the dollar, down 14 percent since the start of the year.
Indonesia's economy is forecast to accelerate in the third quarter of this year, with household consumption showing signs of improvement and investment is expected to rise in connection with greater government spending on infrastructure projects, such as toll roads, power stations and dams.
BI also expects exports to continue to slowly improve as the global economy recovers, and for 2015 growth is projected in the 4.7 to 5.1 percent range.
In the second quarter, Indonesia's Gross Domestic Product expanded by 3.78 percent from the first quarter for annual growth of 4.67 percent, slightly below the first quarter's 4.72 percent.
BI still expects to attain its 2015 inflation target of 4.0 percent, plus/minus 1 percentage point, though August inflation only eased to 7.18 percent from July's 7.26 percent.
BI said inflationary pressures were still controlled by anchored expectations and domestic moderation while changes to various transportation fares, especially airfares, intra-city fares and rail fares contributed to administered price deflation while prices of various foods increased, such as ready-to-consume foods, and education fees rose.
BI Governor Agus Martowardojo recently said he expected inflation to drop to 7.08 percent in August and the central bank would have room to cut rates later this year as inflation cools.
Bank Indonesia issued the following statement:
"The BI Board of Governors decided on 17th September 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 consistent with efforts to control inflation within the target corridor of 4±1% in 2015 and 2016. In addition, the decision is also part of Bank Indonesia’s measures to anticipate possibilities of fed fund rate hike. In the near term, amidst an uncertain global economy, BI policy will continue to focus on Rupiah stabilisation measures by optimising monetary operations on the Rupiah and foreign exchange markets, strengthening forex supply and demand management, while continuing to deepen the money market. Furthermore, Bank Indonesia constantly strengthens its macroprudential and monetary policy mix in order to maintain macroeconomic stability, in particular exchange rate and financial system stability to bolster economic sustainability. Additionally, Bank Indonesia welcomes the government’s recent policy package, unveiled on 9th September 2015, aimed at propping up the flagging economy through structural reforms. Moving forward, Bank Indonesia will continue to strengthen policy coordination with the government in order to support effective and consistent structural policies as the key to a sound economic outlook in Indonesia.
Despite early indications of US economic momentum, global economic growth was weaker than previously projected. The global slowdown stemmed primarily from limited growth in emerging market countries, particularly China. The US economic growth is estimated to be higher than previously projected, gaining momentum on stronger consumption. Yuan devaluation, however, could undermine US exports, with inflation coming in below target. Consequently, uncertainty concerning the proposed FFR hike in the United States lingered, with the increase now expected towards year end. Meanwhile, the economy of Europe was predicted to improve on robust domestic demand and future consumer confidence. In contrast, the Chinese economy continued to moderate despite ongoing improvements in the property sector. Limited growth was forecasted for Japan in line with sluggish domestic demand. Solid growth, however, was projected for India’s economy, with a bias towards the lower end of the range. In addition to uncertainty concerning the proposed FFR hike, global financial market risk also escalated due to China’s policy of yuan devaluation and adopting a more flexible exchange rate regime
On the home front, the domestic economy was projected to accelerate in Q3/2015. Household consumption has shown signs of improvement, reflecting a surge in motorcycle sales. Investment is also expected to increase congruous with greater government investment as more infrastructure projects begin construction, such as toll roads, power stations and dams. Furthermore, higher cement sales, imports of capital goods and stronger credit growth are all indicative of increasing investment activity. Furthermore, the absorption of regional fiscal spending could potentially increase in line with special government measures. On the other hand, exports will continue to improve gradually as the global economy recovers. On an annualised basis, therefore, economic growth was projected in the 4.7-5.1% range for 2015 in line with consistent government structural reforms implemented through various economic policy packages and infrastructure projects.
The trade balance of Indonesia recorded a surplus in August 2015. Although lower from the previous period, the trade surplus in August stood at US$0.43 billion. The decline stemmed from a narrower non-oil and gas trade surplus as imports surged of machinery and mechanical equipment, electrical equipment as well as iron and steel. The import growth of such commodities provided early indications of increasing economic activity. In addition, the oil and gas trade deficit narrowed on the month earlier as imports declined and exports increased. In terms of the financial account, despite growing pressure on foreign capital inflows as global uncertainty spread, accumulative foreign portfolio inflows to financial markets in Indonesia through to August 2015 totalled US$3.4 billion. Consequently, the position of foreign exchange reserve assets at the end of August 2015 stood at US$105.3 billion, equivalent to 7.1 months of imports or 6.9 months of imports and servicing public external debt, which is well above the international adequacy standard of three months.
The Rupiah depreciated on the back of intense external pressures. On August 2015, the Rupiah fell by an average of 2.9% (mtm) to a level of Rp13,789 per US dollar. Pressures mainly originated from the Yuan devaluation policy of the People’s Bank of China combined with uncertainty over the proposed FFR hike in the United States. Domestically, however, demand for US dollars surged in order to service foreign debt, which exacerbated the Rupiah overshoot. Addressing the aforementioned developments, Bank Indonesia continued to intervene on the market through Rupiah stabilisation measures in accordance with the currency’s fundamental value, thereby nurturing macroeconomic and financial system stability. In addition, Bank Indonesia also optimised monetary operations to manage demand and bolster foreign currency supply.
Inflation fell in August 2015 on post-Eid-ul-Fitr price corrections. CPI inflation was recorded at 0.39% (mtm) or 7.18% (yoy) in August 2015 as a result of administered price deflation and controlled core inflation. Therefore, headline inflation for 2015 through to August stood at 2.29% (ytd). Core inflation was recorded at 0.52% (mtm) or 4.92% (yoy), up on the month earlier due to rising education fees and more expensive ready-to-consume foods. Inflationary pressures were controlled by anchored expectations and domestic economic moderation. Corrections to various transportation fares, especially airfares, intra-city fares and rail fares, contributed to administered price deflation. Meanwhile, volatile foods experienced inflation as the prices of various foodstuffs increased. Based on inflation through to August 2015, Bank Indonesia perceives the inflation target of 4±1% for 2015 as attainable through the backing of policy coordination to control inflation nationally and regionally.
Financial system stability remained solid, underpinned by a resilient banking system and relatively stable financial markets. Banking industry resilience endured, with credit, liquidity and market risks well mitigated. The Capital Adequacy Ratio (CAR) remained stong, well above the statutory minimum of 8% at 20.5% in July 2015. Meanwhile, non-performing loans (NPL) were low and stable at 2.7% (gross) or 1.4% (net). In terms of the intermediary function, credit growth slowed to 9.7% (yoy), but escalated on August, estimated to reach 10,9%. In the mean time, deposit growth reached 14.6% (yoy) on July 2015. Credit growth was forecasted to increase in upcoming periods as economic activity escalates and Bank Indonesia loosens its macroprudential policy stance."
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