It is Bank Indonesia's (BI) first rate cut since since October 2016. From January through June last year BI lowered its previous benchmark rate four times by a total of 100 basis points and then cut the current RR rate by a total of 50 basis points in August and October 2016.
The rate cut surprised most economists, who expected BI to continue to maintain its rate despite a hint by Governor Agus Martowardojo last week that he favored a rate cut if data supported it.
In addition to lower than expected growth, BI said external risks from the U.S. Federal Reserve's plan to raise rates and normalize its balance sheet had eased so its own interest rates remained attractive and lower rates should help support higher economic growth.
Indonesia's economy grew by a lower-than-expected 4.0 percent in the second quarter, the first quarterly expansion since the third quarter of last year, for annual growth of 5.01 percent, unchanged from the first quarter and below forecasts of 5.10 percent growth and second quarter 2016 growth of 5.18 percent.
While growth was supported by rising investment from faster government spending on infrastructure, BI said household consumption contracted in the second quarter and exports slowed due to lower growth in the export volume of manufactured products.
But BI confirmed its 2017 forecast for growth of between 5.0 and 5.4 percent, up from 5.02 percent last year, while the government is targeting growth of 5.2 percent.
For 2018 BI said it expects growth to accelerate to 5.1-5.5 percent on the back of rising investment and consumption from more expansive government spending and as monetary easing continues.
Indonesia's current account deficit rose to US$4.962 billion in the second quarter of 2017 from $2.363 billion in the first quarter but was down from the second quarter of 2016's deficit of $4.974 billion.
But BI said a large capital and financial account surplus of US$5.9 billion was financing the current account deficit, which amounted to 1.96 percent of Gross Domestic Product in the second quarter and is expected to remain in a range of 1.5-2.0 percent of GDP this year and 2.0-2.5 percent in 2018, below the safe limit of 3.0% of GDP.
Indonesia's foreign exchange reserves end-July were US$127.8 billion, for 9 months of imports.
Indonesia's headline inflation rate declined to 3.88 percent in July from a 2017-high of 4.37 percent in June as the rise in raw food prices slowed while the rupiah has been relatively stable since late last year and was trading at 13,348 to the U.S. dollar after the rate cut, up 1.13 percent this year.
BI said the stable rupiah exchange rate was supported by continued confidence in the country's macroeconomic stability and the exchange rate is expected to remain stable, supported by its balance of payments and a deepening of its domestic foreign exchange market.
Bank Indonesia issued the following statement:
"The BI Board of Governors agreed on 21st - 22nd August 2017 to lower the BI 7-day Reverse Repo Rate 25 basis points (bps) from 4.75% to 4.50%, while also lowering the Deposit and Lending Facility rates 25 bps to 3.75% and 5.25% respectively, effective 23rd August 2017.
This will be followed by a decrease in interest rates on other monetary instruments.The decision was consistent with the rooms for monetary policy easing, as evidenced by low inflation with 2017 and 2018 inflation projected within the target range, and current account deficit under control within a healthy range. External risks, relating to the Fed hiking its Fed Funds Rate (FFR) and unwinding its balance sheet, have decreased, resulting in the still-attractive domestic interest rate in Indonesia, compared to the external interest rate. The policy rate easing is expected to reinforce intermediation in the banking sector, to strengthen financial system stability as well as support higher economic growth. Bank Indonesia constantly strengthens its mix of monetary, macroprudential and payment system policy to maintain macroeconomic and financial system stability. Furthermore, Bank Indonesia will continue to strengthen coordination with the Government and other authorities to ensure that inflation control, growth stimulus, and structural reforms are going well enough to support sustainable economic growth.
Global economic expansion continues, entailed with shifts in sources of growth. On one hand, solid consumption and expanding exports are driving China’s economy. In Europe, stronger economic growth is expected on the back of increased consumption and exports performance. On the other hand, the flagging US economy is consistent with weaker consumption and investment, subdued by the oil price outlook. The developments in global economic could prompt an increase in world trade volume (WTV), while international commodity prices are set to remain high. Meanwhile, the Fed is estimated to raise the FFR once at the end of 2017 while the US balance sheet normalization expected to be announced in September 2017.
Indonesia’s economic growth in the second quarter of 2017 was recorded lower than expected. National economic growth stood at 5.01% (yoy) in the second quarter of 2017, lower than that of the same period last year of 5.18% (yoy). The growth was supported by investment gains, particularly building investment in line with acceleration on government infrastructure expenditure and increasing on private investment projects. On the other hand, household consumption growth during the second quarter slowed, while government consumption contracted after spending was delayed. Externally, exports posted slower growth due to the tepid global economic recovery, which triggered a decline in manufacturing export volume. Spatially, slow exports was mainly reported in the islands of Java, Sulawesi and Kalimantan, resulting in slower growth in the areas. Moving forward, economic growth is expected to improve on the back of increased investment and consumption activities, in line with more expansive government spending and additional rooms to ease monetary policy. Bank Indonesia predicts growth in the 5.0% - 5.4% range for 2017 and 5.1%-5.5% range for 2018.
Indonesia’s balance of payments (BOP) recorded a surplus, while current account deficit remains well maintained and financed by a large surplus in the capital and financial account. In the second quarter of 2017, the BOP recorded USD0.7 billion surplus, supported by the USD5.9 billion surplus in the capital and financial account, well over the current account deficit of USD5.0 billion (1.96% of GDP). The position of reserve assets at the end of July 2017 was recorded at USD127.8 billion, equivalent to 9.0 months of imports or 8.7 months of imports and servicing government external debt, which is well above the international adequacy standard of three months. Moving forward, the BOP performance is expected to remain in surplus throughout 2017 and 2018. Current account deficit is expected to remain within a healthy range of under 3% of GDP, namely 1.5%-2.0% of GDP in 2017 and 2.0%-2.5% in 2018.
The rupiah remained relatively stable, supported by high confident in Indonesia’s macroeconomic stability.The rupiah appreciated by an average of 0.30% to Rp13,309 per USD in the second quarter of 2017. Rupiah exchange rate stability was supported by the influx of foreign capital along with the prospect of positive returns, followed by the abundant supply of corporate foreign exchange on the domestic forex market. Looking ahead, Rupiah exchange rate is expected to remain stable, supported by maintained trade balance and deeper domestic forex market. Bank Indonesia shall continue to conduct exchange rate stabilisation measures in line with the currency’s fundamental value, while maintaining market mechanisms.
Inflation was maintained at a lower-than-expected rate, thus reinforcing achievement of the inflation target, namely 4%±1% in 2017 and 3.5±1% in 2018. CPI inflation was recorded at 2.60% (ytd) in July 2017 or 3.88% (yoy) annually. In addition to the controlled administered prices inflation, volatile foods inflation and core inflation were recorded lower than the average post-Eid rate for the past three years. Annually, low core inflation was recorded at 3.05% (yoy), along with limited domestic demand, maintained inflation expectation, and stable exchange rate. Moving forward, inflation is expected to remain low within target, on the back of adequate supply compared to demand (output discrepancy), stable exchange rate, global trend of decreased inflation, and low risk in administered prices hike. Bank Indonesia will continue to strengthen coordination with the central government and regional administrations to maintain stable and low inflation.
Banking industry resilience and stable financial markets continued to strengthen financial system stability. In June 2017, the Capital Adequacy Ratio (CAR) of the banking industry was recorded at 22.5% and the liquidity ratio at 21.2%. Meanwhile, non-performing loans (NPL) stood at 3.0% (gross) or 1.4% (net). The banking industry confirmed that deposit growth decelerated from 11.2% (yoy) in May 2017 to 10.3% (yoy) in June 2017, while loan growth slowed from 8.7% (yoy) in May 2017 to 7.8% (yoy) in June 2017. At the end of 2017, deposit growth is expected to be in the range of 9%-11%, while credit growth is estimated to be lower than previously expected, in the range of 8%-10%. Banking intermediation is expected to improve in 2018,with credit and deposit growth expected at 10-12% and 9-11%, respectively. To support economic funding as well as financial market deepening, Bank Indonesia with related authorities will speed up consolidation process in the banking sector while promoting credit distribution and corporate funding through financial markets. The policy, along with policy rate easing, is aimed at boosting an optimum banking intermediation to support national economic recovery."
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