Bank Indonesia (BI) lowered its benchmark BI rate by another 25 basis points to 6.75 percent and has now cut the rate by a total of 75 basis points this year following cuts in January and February.
Today's rate cut was expected in light of declining inflationary pressures and lower volatility in financial markets. It also follows a statement by the bank's governor, Agus Martowardojo on March 7 when he said that the central bank was currently taking an easing stance and relaxing its policy.
Indonesia's inflation rate rose to 4.42 percent in February from January's 4.14 percent but the BI said the downward trend in oil prices should alleviate inflationary pressures and inflation should remain within its target corridor of 4.0 percent, plus/minus 1 percentage point, in 2016.
After declining steadily in recent years, Indonesia's rupiah has been gaining strength since early October last year, bolstered by the inflow of foreign capital, including to its stock market, and less demand for foreign exchange in the domestic market following new rules concerning the mandatory use of the rupiah.
The rupiah was trading at 13,063 to the U.S. dollar today, up 5.6 percent this year.
Indonesia's economy grew by an annual rate of 5.04 percent in the fourth quarter of last year and the BI expects growth to top that in the first quarter due to an acceleration of fiscal stimulus.
For 2016 the BI still expects growth in a range of 5.2 to 5.6 percent, above 2015's 4.8 percent, as household consumption remains strong while the export sector will continue to be under pressure from slower global growth and lower commodity prices.
Bank Indonesia issued the following statement:
"The BI Board of Governors agreed on 16-17th March 2016 to lower the BI Rate 25 basis points (bps) to 6.75%, with the Deposit and Lending Facility rates at 4.75% and 7.25% respectively, effective 18th March 2016. The move is consistent with greater room to ease monetary policy along with a solid macroeconomic stability, specifically indicated by the persistently less intense inflationary pressures in 2016 and 2017, while uncertainties in the global financial market decreased. Amid a sluggish global economic growth, the lower BI Rate is expected to enhance domestic demand to bolster economic growth momentum, while maintaining macroeconomic stability. The Board of Governors will be cautious in determining future monetary easing, taking into account overall assessments and forecast of domestic macroeconomy and financial systems stability, as well as global economic developments. To enhance the effects of policy transmition, future focus on the short term are on strengthening operational framework through a consistent term structure of monetary operations. Furthermore, Bank Indonesia will also continue to strengthen coordination with the Government to control inflation, support growth stimuli and ensure structural reforms remain on track, thereby underpinning sustainable economic growth moving forward.
The global financial markets uncertainty has decreased, with the expected gradual hike of the Fed Fund Rate (FFR) and negative policy rate in Japan and Europe. Global growth on 2016 and 2017 is expected to be lower than previously expected, with sluggish economic recovery in several advanced countries and economic slowdown in developing countries. Sluggish economies and low inflation in Japan and Europe forced the European Central Bank (ECB) and Bank of Japan (BOJ) to extend loose monetary policy through liquidity injection and negative interest rate policy correspondingly. The People’s Bank of China (PBoC) has lowered the Reserve Requirement Ratio in order to stimulate the flagging domestic economy. Meanwhile, The Fed has kept the FFR target at 0.25-0.50% on March 16th 2016, along with the moderate consumption growth, below target inflation level, and global economic and financial risks. The FFR hike is not expected until the second half of the year, with a lesser magnitude than previously predicted. On commodity markets, the oil price was predicted to remain low, due to abundant supply and dwindling demand.
Domestic economic growth has a potential to continue improving throughout the first quarter of 2016 on the coattails of fiscal stimuli acceleration. Economic growth in Q1/2016 is predicted to surpass that posted in the previous period, supported by government consumption and investment. The increased government investment was bolstered by government capital spendings which were accelerated during the first two months of 2016, while the private sector investment is not expected tp increase until future periods. Household consumption remains strong, as reflected by the adequate purchasing power, increased retail sales, and relatively good consumer confidence. Meanwhile, pressures on export will persist in line with global economic moderation and sliding international commodity prices. For 2016, therefore, economic growth is projected in the 5.2-5.6% (yoy) range, exceeding that achieved the year earlier.
The trade surplus expanded in February 2016 on the back of a growing non-oil and gas surplus. Indonesia’s trade balance recorded a larger surplus of USD1.15 billion in the reporting period, higher than that of the previous month, supported by an increased non-oil and gas trade surplus, stemming mainly from exports of jewellery/gems and articles of iron and steel. In addition, the oil and gas account reversed the deficit reported last month to record a surplus. The trade surplus noted in January-February 2016 is consistent with the projected current account deficit in the first quarter of the year. The current account deficit is expected to be covered by the surplus in financial account, boosted by a stream of portfolio investment through to February 2016 which amounted to USD2.2 billion. A positive flow of foreign capital onto the domestic stock market was also recorded, along with the increasingly promising domestic economic outlook. The position of official reserve assets at the end of February 2016 stood at USD104.5 billion, equivalent to 7.6 months of imports or 7.3 months of imports and servicing public external debt, which is well above the international adequacy standard of three months.
The deluge of foreign capital inflows and a decrease of foreign exchange demand in the domestic market prompted Rupiah appreciation. In February 2016, the Rupiah appreciated 3.09% (ytd) to a level of Rp13,372 per USD. The Rupiah appreciation trend was bolstered by inflows of foreign capital, including to the stock market. On the home front, the Rupiah appreciated on the positive perception of investors concerning the promising economic outlook after the BI Rate was lowered, the government introduced policy packages aimed at improving the investment climate and the effective implementation of infrastructure projects. A decrease of foreign exchange transaction between Indonesian citizens, following the Bank Indonesia regulation concerning mandatory use of Rupiah, from an average of US$7.3 billion to less than US$3 billion has also supported the Rupiah appreciation. Externally, however, risk eased on global financial markets along with the monetary easing policy of several advanced economies. Looking ahead, Bank Indonesia will continue to maintain exchange rate stability in line with the currency’s fundamental value.
Inflation in February remained under control, thereby supporting achievement of the inflation target in 2016 at 4±1%. The Consumer Price Index (CPI) recorded deflation of 0.09% (mtm) in the reporting period, supported by deflation in both administered prices and volatile foods. The deflation of administered prices is mainly contributed by a decrease in household fuel price, along with lower electricity tariffs and airfares. In terms of volatile foods, a correction to most food prices was recorded, with the exception of rice prices due to the ongoing El Nino weather phenomenon. Core inflation remained low and stable at 0.31% (mtm) or 3.59% (yoy) in line with anchored inflation expectations and limited domestic demand. Going forward, the downward oil price trend is expected to further alleviate inflationary pressures. Bank Indonesia projects inflation to stay within the target corridor in 2016, namely 4±1%. Furthermore, policy coordination between Bank Indonesia and the Government will be enhanced to control inflation in anticipation of possible inflationary pressures on volatile foods.
Financial system stability was maintained, underpinned by a resilient banking system and relatively stable financial markets. In January 2016, the Capital Adequacy Ratio (CAR) stood at 21.5%, while non-performing loans (NPL) were recorded at 2.7% (gross) or 1.4% (net). Despite global and domestic economic moderation triggering sluggish corporate performance in several manufacturing subsectors and the infrastructure sector, the impact on banking system resilience was limited. In terms of the intermediation function, credit growth slowed from 10.4% (yoy) last month to 9.6% (yoy). Deposit growth also decelerated in January 2016, from 7.3% (yoy) to 6.8% (yoy). The dual monetary easing of BI Rate and primary reserve requirement, that is starting to transmit to banking rate, is expected to boost liquidity and increase credit growth. Furthermore, in order to support transmission of the lower policy rate, the term structure of monetary operations was also adjusted. "
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