The decision by Bank Indonesia (BI) to maintain its key 7-day reverse repurchase rate at 4.25 percent follows two 25-basis points cuts in August and September. This comes after two cuts by a total of 50 basis points last year after the previous benchmark rate was lowered four times by a total of 100 points.
Today's decision comes after BI in September said its monetary policy stance had shifted to neutral and the BI governor, Agus Martowardojo, said two rate cuts were "sufficient."
Although BI outlined a range of international and domestic risks, it was optimistic about the global economy and said Indonesia's economy should growth faster in the third quarter than in the second quarter and overall growth this year is now "potentially higher than previously estimated."
BI currently forecasts growth this year of 5.0-5.4 percent, rising to 5.0-5.50 percent in 2018.
The central bank said it remained cautious of both international and domestic risks, such as continued consolidation of corporate and banking sectors, tightening monetary policy and fiscal reforms in the United Staes, geopolitical pressures in Europe and the Korean peninsula.
BI pointed specifically to the risks to the global economy from an increase in the U.S. federal funds rate in December, the normalization of the Federal Reserve's balance sheet as well as the change in leadership at the Fed. In addition, there are geopolitical risks from Spain and the change in leadership in several European countries.
But despite these risks, BI sounded optimistic about the world economy, with trading volume and non-oil commodity price growth higher than originally assumed.
China's economy is projected to be stronger than previously expected while economic growth in Europe was also higher as exports improve, investments rise and financial sector developments remain conducive.
The U.S. economy is expected to continue growth on solid consumption and production while BI said India's economy is expected to grow but projection have been revised downward due to the negative impact of demonetization and the new GST tax.
Indonesia's economy expanded by an annual 5.01 percent in both the first and second quarters of this year but consumption in the third quarter should rise on the back of higher government goods expenditure, the distribution of a 13th salary to civil servants and social assistance.
Exports are also seen improving, especially in mining and plantation products, while investments should improve further on robust growth in building investment and in non-construction, such as mining, plantation industries and processing industries.
Indonesia's inflation rate eased to 3.72 percent in September from 3.82 percent in August and BI said it expects inflation to remain within its 2017 target range of 4.0 percent, plus/minus 1 percentage point, and its 2018 and 2019 ranges of 3.5 percent, plus/minus 1 percentage point.
Indonesia's rupiah remained stable until the end of September when it weakened, with BI saying this trend was experienced by almost all world currencies due to rising expectations of rate hikes, monetary policy normalization and tax reform in the U.S.
The rupiah was trading at 13,517 to the U.S. dollar today, down 0.13 percent this year.
Bank Indonesia issued the following statement:
"The BI Board of Governors agreed on 18th and 19th October 2017 to hold the BI 7-day Reverse Repo Rate at 4.25%, while maintaining the Deposit Facility (DF) and Lending Facility (LF) rates at 3.50% and 5.00% respectively, effective 20th October 2017. The decision was consistent with efforts to maintain macroeconomic and financial system stability, while stimulating the domestic economic recovery but remaining mindful of prevailing domestic and global economic dynamics. The current policy rate is considered adequate to maintain inflation within the target corridor and current account deficit at a sound level. Bank Indonesia shall remain vigilant of the global risks, relating to tighter monetary policy and fiscal reform plans in the US, geopolitical pressures in Europe and Korean peninsula, as well as domestic risks, including the ongoing consolidation in the corporate and banking sectors. Furthermore, Bank Indonesia will continue to coordinate with the Government to reinforce the policy mix in order to maintain macroeconomic stability, financial system stability and strengthen fundamentals of Indonesia’s economy.
The global economic gains have persisted, with an upward tendency, driven by stronger growth in Europe and China. In Europe, economic growth is predicted to accelerate along with improving export performance, increasing investment, and more conducive financial sector developments. Meanwhile, China’s economic is expected to be higher than previously projected, in line with increasing international trade and resilient private consumption. The US economy is expected to expand on track with the current projection, bolstered by solid consumption and production activities. India’s economic growth is expected to be within the downward revised projection due to the adverse effect of demonetisation and the implementation of GST. Consistent with the improving global economic outlook, the assumptions for world trade volume and non-oil and gas commodity prices have been upgraded. Moving forward, Bank Indonesia will continue to monitor the global risks, including the next Federal Funds Rate (FFR) hike planned for December 2017 and the impact of the Federal Reserve normalising its balance sheet, commencing at the end of October 2017, and transition of leadership in The Fed. In addition, geopolitical risks occurs from Spain and leadership transition process in several European countries. In Asia, geopolitical risks arise from the Korean peninsula.
Economic growth in Indonesia in the third quarter of 2017 is expected to outpace that achieved last period.The economic gains will be supported by fiscal expansion and monetary policy easing. Furthermore, third-quarter consumption accelerated due to 13th month salaries paid to civil servants and social assistance disbursements as well as the high realisation of goods procured by the government. Investment should continue to improve on robust building investment and stronger non-building investment as reflected, among others, by an increase in heavy equipment sales for mining and plantation sector. By sector, economic growth was mainly supported by Trade, Hotel, and Restaurant sector, and Manufacture. Bank Indonesia expects economic growth in 2017 to potentially overshoot the previous expectation while remain within the 5.0-5.4% projection and then accelerate to 5.1-5.5% in 2018.
Indonesia’s trade balance recorded a wider surplus in September 2017. Cumulatively from January-September 2017, the trade surplus stands at USD10.87 billion, up from USD6.41 billion in the same period one year ago. The increase in surplus mainly came from export of primary non-oil and gas products such as coal, palm oil, rubber, nickel, and tin. In addition, export increases are also supported by manufacturing products such as chemical and paper products. Meanwhile, foreign capital inflows to domestic financial markets reached USD10.7 billion as of September 2017. External sector gains have edged up the position of official reserve assets, totalling USD129.4 billion at the end of September 2017, which is equivalent to 8.9 months of imports or 8.6 months of imports and servicing government external debt, exceeding the international standard of around three months of imports.
The rupiah appreciated in September 2017, despite losing ground towards the end of the period. The rupiah strengthened by an average of 0.27% to Rp13,307 per USD in the reporting period. Depreciation at the end of the month was also suffered by most global currencies as a result of hightened expectations of policy rate hike, monetary policy normalization, and planned tax reforms in the United States. Bank Indonesia will continue to stabilise the rupiah in line with the currency’s fundamental value, while maintaining market mechanisms.
Low headline inflation was maintained in line with controlled core inflation and low volatile foods (VF) inflation. CPI inflation in September 2017 stood at 0.13% (mtm) or 3.72% (yoy), below the average in September for the past three years, recorded at 0.15% (mtm). Core inflation has tracked a downward trend due to anchored expectations, low import price, and limited consumption. Furthermore, volatile foods (VF) recorded low inflation, supported by sliding international commodity prices, improving supply and various government policies. Looking forward, Bank Indonesia shall continue to strengthen policy coordination with the Central and Regional Government to control inflation within the target corridor, namely 4.0±1% in 2017 and 3.5±1% in 2018 and 2019.
Banking industry resilience and stable financial markets continued to underpin financial system stability. Maintained stability was reflected by the high Capital Adequacy Ratio (CAR) in the banking industry (23.1%) and a liquidity ratio of 23.4% in August 2017. Meanwhile, non-performing loans (NPL) were recorded at 3.0% (gross) or 1.4% (net). While picking up slightly from 8.2% (yoy) the previous month, credit growth was recorded low at 8.3% (yoy). Meanwhile, deposit growth dropped slightly in August 2017 to 9.6% (yoy) from 9.7% (yoy) the previous month. Bank Indonesia predicts financial intermediation to improve in line with the lower reference rate and macroprudential policy easing, combined with the progress made in terms of banking and corporate sector consolidation. Furthermore, economic financing through the capital market is expected to increase in line with financial market deepening efforts. Bank Indonesia, with other relevant authorities, will continue to coordinate to make sure that financial system stability are well maintained to support economic recovery momentum."
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