Bank Indonesia (BI), which cut its rate by 25 basis points in February, said pressures on macroeconomic stability had eased and this had made room for a rate cut.
However, uncertainty in global financial markets remains high so the bank will continue to monitor global risks and focus on strengthening rupiah liquidity and the supply and demand of foreign exchange.
BI also said it was now convinced that inflation this year will remain within the lower half of its target corridor while the current account deficit would be smaller than previously thought. In addition, growth is expected to rebound due to greater government capital spending.
The rupiah, which started depreciating in April 2014, has rebounded sharply in recent weeks, with the BI saying this was due to "positive sentiment" following the "possible delay" in a rate hike by the U.S. Federal Reserve, optimism about the domestic outlook after the government announces a series of new policies and the BI intervened to stabilize the exchange rate.
Today the rupiah was trading at 13,482.2 to the U.S. dollar, up 9.3 percent since a low of 14,733.5 on Oct. 3, but still down 7.7 percent since the start of the year.
"Bank Indonesia will continue to strengthen efforts to stabilise the rupiah in line with the currency's fundamental value, thereby maintain macroeconomic and financial system stability," BI said.
Indonesia's growth in the third quarter of this year is projected to be slightly higher than the pace in the second quarter due to greater government spending while exports are only expected to rise gradually in line with weaker-than-expected global growth.
The BI maintained its forecast for growth this year of 4.7 to 5.1 percent. In the second quarter, Indonesia's Gross Domestic Product rose by an annual 4.67 percent, down from 4.72 percent in the first quarter.
Indonesia's consumer price inflation rate eased to 6.83 percent in September from 7.18 percent in August, prompting the central bank to predict that inflation for 2015 will be below its midpoint target of 4.00 percent. The BI targets inflation at 4.0 percent, plus/minus 1 percentage point.
Bank Indonesia issued the following statement:
Bank Indonesia was convinced that the 2015 inflation will stay within the lower half of the 4% target corridor, while the current account deficit was predicted at a healthier level than previously thought, namely around 2% of GDP at yearend. Domestic economic growth was expected to rebound on the back of greater government capital spending despite relatively sluggish activity in the private sector.
Bank Indonesia believed that the pressures on macroeconomic stability has eased, making room to loosen its monetary policy. However, with a high uncertainty in the global market, Bank Indonesia will remain vigilant and continue to monitor global risks despite more conducive conditions on global financial markets. Consequently, BI policy will continue to focus, in the near term, on currency stabilisation measures by continuing to maintain the Rupiah stability, strengthening rupiah liquidity management as well as the supply and demand of foreign exchange. Furthermore, Bank Indonesia will continue to reinforce its policy mix in order to maintain macroeconomic and financial system stability. Bank Indonesia also welcomes the recent policy packages released by the Government aimed at catalysing economic growth and expediting structural reforms in order to bolster domestic economic fundamentals. Moving forward, Bank Indonesia will continue to strengthen policy coordination with the Government to support policy consistency and efficacy as the key to a sounder economic outlook.
The global economic recovery was limited, while pressures on global financial markets has begun to ease. This is mainly a result of limited growth in the emerging markets, in particular China, where analysts predicted a further downswing on weaker manufacturing indicators and exports. Conversely, economic growth rebounded in advanced countries but is yet to be considered solid. The US recovery remained fragile due to weak employment indicators, which, when coupled with the dovish announcement relayed by the FOMC in September 2015, pushed predictions for the Fed Funds Rate (FFR) hike further back. Meanwhile, the economy of Europe was expected to continue improving on the back of strong domestic demand and an expansive manufacturing sector. The sluggish global recovery perpetuated the international commodity price slide. Pressures on global financial markets began to dissipate in early October 2015, however, in line with the postponed FFR hike. Nonetheless, Bank Indonesia will continue to monitor global risks that could potentially trigger a portfolio capital reversal from emerging market countries, including Indonesia.
On the home front, domestic economic growth in Q3/2015 was projected to slightly outpace that posted in the previous quarter due to greater capital spending by the government despite relatively sluggish private sector activity. Government investment accelerated in line with greater capital spending, reflecting an increase in the value of government projects entering the construction phase. Stronger sales of cement and heavy equipment further confirmed the increase in investment activity. In addition, while relatively limited, private investment was also expected to buck its downward trend due to the policy packages introduced recently by the government, including deregulation to buoy the investment climate. On the other hand, consumption indicators, including retail sales and consumer confidence, were down but have begun to show signs of improvement with automotive sales continuing to rise. Consequently, exports were also predicted to increase gradually in line with weaker-than-expected global growth. Economic growth was projected in the range of 4.7-5.1% for 2015. Government consistency in terms of pushing structural reforms through various policy packages and the realisation of infrastructure projects are expected to drive momentum to a sounder economy.
The trade balance of Indonesia again recorded a surplus in September 2015, primarily supported by a non-oil and gas trade surplus. The trade surplus stood at USD 1.02 billion, exceeding the USD0.33 billion posted in August 2015. The non-oil and gas surplus was due to improvements in the non-oil and gas exports, especially manufacturing exports, amid a decline in the non-oil and gas imports, specifically that of raw materials and consumer goods. On the other hand, the oil and gas trade deficit declined in line with a sharp drop off in oil and gas imports. In terms of the financial account, although non-resident portfolio inflows to financial markets in Indonesia began to ebb, the financial account still reached net inflow of USD2.9 billion accumulatively at the end of September 2015. Consequently, official foreign exchange reserve assets stood at USD101.7 billion at the end of September, 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 rebounded at the beginning of October after intense depreciatory pressures were felt in September 2015. Rupiah appreciation stemmed from positive sentiment regarding the possible delay of FFR hike and optimism concerning the domestic economic outlook after the government released a series of policy packages and Bank Indonesia intervened to stabilise the exchange rate. The combination of policy packages spurred an influx of foreign capital to financial markets in Indonesia, which subsequently propped up the Rupiah. Bank Indonesia will continue to strengthen efforts to stabilise the rupiah in line with the currency’s fundamental value, thereby maintaining macroeconomic and financial system stability.
The Consumer Price Index (CPI) experienced deflation in September 2015, leading to sufficiently low headline inflation from January-September 2015. CPI deflation stood at 0.05% (mtm) or 6.83% (yoy) on an annualised basis, primarily due to volatile foods and administered prices. Consequently, headline inflation from January-September 2015 was relatively low at just 2.24% (ytd), providing sound evidence of stable prices. Volatile food deflation stemmed from abundant food supply as the harvesting season persisted for a number of commodities at several production hubs. Meanwhile, administered prices also experienced deflation as a result of a post-Eid correction to airfares together with lower Pertamax and Pertalite petrol prices as the international oil price continued to slump. On the other hand, core inflation was recorded at 0.44% (mtm) or 5.07% (yoy), which was down on the previous period due to ready-to-consume foods, education fees and gold jewellery. Congruous with increasingly controlled and lower inflation, Bank Indonesia predicted the 2015 inflation will be below the inflation target midpoint of 4%.
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. In August 2015, the Capital Adequacy Ratio (CAR) remained well above the 8% minimum threshold at 20.5%, while non-performing loans (NPL) were low and stable at 2.8% (gross) or 1.4% (net). In terms of the intermediation function, credit growth accelerated to 10.9% (yoy). Deposit growth in August 2015 was recorded at 13.2% (yoy). Looking forward, credit growth is predicted to continue accelerating in line with an increase in economic activity and the looser macroprudential policy stance adopted by Bank Indonesia."
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