The decision to maintain steady rates comes after Bank Indonesia (BI) raised its rate three times this year by a total of 100 basis points, most recently on June 29, to strengthen the rupiah's exchange rate while also intervening in the currency and government securities markets to maintain market liquidity.
Moving forward, BI said it would remain vigilant of uncertainty in global financial markets and maintain the rupiah's exchange rate in line with fundamental values.
The rupiah fell around 0.8 percent in response to BI's decision to maintain rates today to 14,538 per U.S. dollar and is now down 6.7 percent since the start of this year despite rising in the wake of the first two rate hikes in May.
The central bank said U.S. economic growth is high with rising inflation while growth in Europe is weaker than expected and China's economic growth is not yet improving. This is prompting appreciation of the U.S. dollar against nearly all currencies, including the rupiah and high uncertainty in global financial markets has also resulted in a reversal of capital from emerging markets.
Momentum of growth in Indonesia continued to build in the second quarter of this year on strong domestic demand, backed by fiscal stimulus, higher incomes, controlled inflation and growing consumer confidence, BI said, adding that solid investment is expected to continue.
But export growth is lower than forecast due to sliding international commodity prices, BI said, forecasting that growth this year would approach the lower end of the forecast range of 5.1 - 5.5 percent.
Indonesia's economy decelerated to annual growth of 5.06 percent in the first quarter of this year from 5.19 percent in the previous quarter.
Indonesia's inflation rate eased to 3.12 percent in June from 3.23 percent in May and is forecast by BI to remain around the midpoint of its target range of 3.5 percent, plus/minus 1 percentage point, in 2018.
Bank Indonesia issued the following statement:
"The BI Board of Governors agreed on 18th and 19th July 2018 to hold the BI 7-day Reverse Repo Rate at 5.25%, while maintaining the Deposit Facility (DF) and Lending Facility (LF) rates at 4.50% and 6.00% respectively. The policy is consistent with efforts by Bank Indonesia to maintain domestic financial market attractiveness against a backdrop of pervasive uncertainty blighting the global financial markets in order to maintain stability in general and Rupiah exchange rate stability in particular. Bank Indonesia believes that the macroprudential policy easing measures are able to increase liquidity management flexibility as well as banking intermediation for economic growth. Bank Indonesia also strengthens coordination with the government and other related authorities to maintain stability and implementation of structural reform to reduce current account deficit, including foreign exchange from tourism and private sector infrastructure financing. Moving forward, Bank Indonesia will continue to monitor the global and domestic economic developments and outlook in order to strengthen policy mix response in maintaining domestic financial market attractiveness.
Global financial market uncertainty remain high, amid uneven world economic growth dynamics. Bank Indonesia forecast high US economic growth with increasing inflation, while economic growth in Europe is indicated weaker than previously predicted and China’s economic growth is not yet improving. Dynamics of the global economy prompted slowdown in the growth of world trade volume and commodity prices. With inflation increasing, the Fed is forecast to continue the Fed Fund Rate (FFR) hike. The US-China trade tensions elevate risks in the global financial market and sustainability of global economic recovery. Developments in the global economy prompted USD appreciation against nearly all global currencies, including the Rupiah. High uncertainty in the global financial market has also resulted in capital reversal from emerging markets.
At home, national economic growth momentum continued to build in the second quarter of 2018 on strong domestic demand. Household consumption was backed by fiscal stimuli, higher incomes, controlled inflation and growing consumer confidence amongst the middle and upper classes. Solid investment is expected to endure, not only supported by infrastructure projects but also non-infrastructure projects through building and non-building investment. Strong domestic demand has edged up import growth, particularly imports of capital goods such as transportation equipment, machinery, equipment and spare parts. Meanwhile, export growth is lower than previously predicted due to sliding international commodity prices. The weaker position of net exports has affected the domestic economic growth outlook for 2018, which is approaching the lower end of the 5.1-5.5% range.
Indonesia’s trade balance recorded a surplus in June 2018, reinforced by a non-oil and gas trade surplus coupled with a narrower oil and gas trade deficit. The non-oil and gas trade surplus stemmed from fewer imports of machinery and mechanical appliances, electrical machinery and equipment, iron and steel, plastics and plastic products as well as organic chemicals. On the other hand, the oil and gas trade deficit narrowed as non-oil and gas exports surged and non-oil and gas imports declined. Consequently, the trade balance overcame a USD1.5 billion deficit in May 2018 to record a USD1.7 billion surplus in June 2018. In general, trade surplus in June 2018 has alleviated pressures on the current account deficit, which is predicted to expand in the second quarter of 2018. Current account deficit in 2018 is estimated to remain within an acceptable threshold of 3% of GDP. Therefore, the position of reserve assets stood at USD119.8 billion in June 2018, equivalent to 7.2 months of imports or 6.9 months of imports and servicing government external debt, which is well above the international standard of three months.
The Rupiah experienced depreciatory pressures against broad USD appreciation. The Rupiah strengthened at the beginning of July 2018 in response to Bank Indonesia’s pre-emptive, front-loading and ahead-of-the-curve monetary policy instituted at the Board of Governors’ meeting (RDG) held in June 2018 through a 50bps hike in the BI 7-Day (Reverse) Repo Rate. The favourable market response drew non-resident capital inflows to domestic financial markets, especially tradeable government securities (SBN), thus prompting Rupiah appreciation. Pressures on the Rupiah re-emerged as uncertainty enveloped the global financial markets, which triggered broad USD appreciation. On 18th July 2018, the Rupiah stood at Rp14,405/USD, down 0.52% (ptp) on the level recorded at the end of June 2018. Consequently, the Rupiah has depreciated by 5.81% (ytd) on the level posted at the end of 2017, not as severe as reported in other developing economies, including the Philippines, India, South Africa, Brazil and Turkey. Moving forward, Bank Indonesia will remain vigilant of global financial market uncertainty risks, while maintaining the Rupiah exchange rate in line with the currency’s fundamental value, backed by financial market deepening efforts. The policies remain backed by double intervention strategies and monetary operation strategies to maintain adequate liquidity, especially in the Rupiah and interbank swap markets.
Inflation remains under control with stable supply maintained. CPI inflation was recorded at 0.59% (mtm) in June 2018, up from 0.21% (mtm) the month earlier. The increase stemmed from the seasonal spike in demand during Eid-ul-Fitr. Despite accelerating, the rate in June 2018 was below the historical average during Eid-ul-Fitr for the past four years at 0.81% (mtm). Annually, therefore, headline inflation decreased from 3.23% (yoy) to 3.12% (yoy) in the reporting period. Controlled inflation was backed by stable core inflation in line with Bank Indonesia’s policy consistency to anchor rational inflation expectations, including efforts to maintain the Rupiah exchange rate in line with the currency’s fundamental value. Moreover, inflationary pressures on volatile foods (VF) were lower than the corresponding historical average during Eid-ul-Fitr as a result of adequate supply. Conversely, inflation of administered prices (AP) increased, induced by rising airfares and intercity rates as demand increased during Eid-ul-Fitr. Looking forward, inflation in 2018 is predicted around the midpoint of the 3.5±1% (yoy) target corridor. Furthermore, policy coordination between Bank Indonesia and the Central Government and Regional Administrations will be strengthened in terms of controlling inflation.
The financial system remains stable and the bank intermediation function is improving, while nonbank financing continues to expand. Maintained financial system stability is reflected in the high Capital Adequacy Ratio (CAR) reported by the banking industry at 22.1% and the liquidity ratio of 20.3% in May 2018. In addition, the banking industry maintained a low level of non-performing loans (NPL) at 2.79% (gross) or 1.28% (net). Financial system stability is also contributing to improvements in the bank intermediation function. Deposit growth declined from 8.1% (yoy) to 6.5% (yoy). Bank Indonesia believes that the decline will not hamper credit growth, considering the ample bank liquidity to support development financing. Credit growth accelerated from 8.9% (yoy) to 10.3% (yoy) in May 2018. On the other hand, nonbank economic financing through the financial markets, such as initial public offerings (IPO) and rights issues, corporate bonds, medium-term notes (MTN) and Negotiable Certificates of Deposit (NCD), soared 60.2% (yoy) in May 2018. Based on the recent domestic economic gains and progress in terms of banking industry and corporate consolidation, Bank Indonesia projects stronger credit and deposit growth in 2018 at 10-12% (yoy) and 9-11% (yoy) respectively. The higher banking intermediation is also supported by a number of relaxations in Bank Indonesia’s macroprudential policy, through the easing of Loan to Value (LTV) policy and the implementation of Macroprudential Intermediation Ratio, Macroprudential Liquidity Buffer, and Average Reserve Requirement policies."
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