Bank Indonesia (BI) cut its benchmark 7-day reverse repo rate by another 25 basis points to 5.00 percent and has now cut it by 100 points following cuts in July, August, September and today.
BI also cut its deposit rate (DF) by a similar 25 basis points to 4.25 percent and the lending rate (LF) to 5.75 percent.
In addition to providing easier lending rates, BI said its policy was supported by a strategy to maintain adequate liquidity to facilitate the transmission of an accommodative monetary policy while a deepening of payment systems and financial markets will also help foster economic growth.
"Going forward, Bank Indonesia will monitor domestic and global economic developments in using its room to implement and accommodative policy mix in order to maintain controlled inflation and external stability as well as to support economic growth momentum," BI said.
Despite the positive outcome from recent trade talks between the U.S. and China, BI said global economic growth was continuing to moderate and flatter economic growth in the U.S. was due to retreating economic confidence triggered by declining exports. This is stifling non-residential investment and household consumption, also including in Europe, Japan, China and Japan.
BI lowered its 2019 forecast for Indonesia's economic growth slightly to "the lower end" of a 5.0 to 5.4 percent range from last month's forecast of "below the midpoint" of 5.0 to 5.4 percent.
For 2020 BI confirmed its forecast for growth towards the midpoint of a 5.1 to 5.5 percent range.
Indonesia's inflation rate remains under control and BI confirmed its forecast for inflation this year to be below the midpoint of its target range of 3.5 percent, plus/minus 1 percentage point.
For 2020 inflation is seen within its new target range of 3.0 percent, plus/minus 1 percentage point.
Bank Indonesia released the following statement:
"The BI Board of Governors agreed on 23rd and 24th October 2019 to lower the BI 7-day Reverse Repo Rate by 25 bps to 5,00%, Deposit Facility (DF) rates lowered 25 bps to 4,25% and Lending Facility (LF) rates lowered 25 bps to 5,75%. The policy is consistent with controlled inflation and attractive returns on domestic financial investment assets, and as a pre-emptive measure to stimulate domestic economic growth momentum against a backdrop of global economic moderation. Furthermore, the policy is supported by a monetary operations strategy optimised to maintain adequate liquidity and facilitate the effective transmission of an accommodative policy mix. Bank Indonesia is maintaining an accommodative macroprudential policy stance in order to stimulate bank lending and expand economic financing. Payment system policy and financial market deepening will also be strengthened to foster economic growth. Going forward, Bank Indonesia will monitor domestic and global economic development in using its room to implement an accommodative policy mix in order to maintain controlled inflation and external stability as well as to support economic growth momentum. In addition, Bank Indonesia will continue to strengthen coordination with the Government and other relevant authorities in order to maintain economic stability and catalyse domestic demand, while boosting exports and tourism and attracting foreign capital flows, including Foreign Direct Investment (FDI).
Global economic growth is continuing to moderate despite less uncertainty after the United States and China met for trade talks in October 2019. A softening in the global economy stems from declining world trade volume due to the ongoing trade dispute between the United States and China, coupled with sluggish production activity reported in a number of countries. Flatter growth in the United States is due to retreating economic confidence triggered by declining exports, which is stifling non-residential investment and household consumption. Similar conditions have been observed in Europe, Japan, China and India. Current global dynamics have exacerbated downside pressures on oil prices and international commodity prices, leading to mild inflationary pressures. In response, various countries have loosened monetary policy and introduced fiscal stimuli. Meanwhile, less uncertainty in global financial markets has driven foreign capital inflows to developing economies. Moving forward, uncertainty triggered by trade tensions between the United States and China along with other geopolitical risks will continue to demand vigilance due to the potential impact on efforts to stimulate economic growth and maintain foreign capital inflows to bolster external stability
Strong global headwinds continue to overshadow Indonesia's economy. The ongoing export contraction has improved despite waning global demand and lower international commodity prices. The modest gains come amidst positive manufacturing export growth, especially automotive exports to ASEAN, and gold exports. Investment, non-building investment in particular, remains weak, yet the latest surveys point to an upsurge predicted in the fourth quarter of 2019 as business confidence continues to grow. Meanwhile, building investment growth has been maintained by the development of national strategic projects. Household consumption growth remains stable, supported by low inflation and social aid program (bansos) disbursements. Moving forward, the policy mix instituted by Bank Indonesia in conjunction with the Government is expected to maintain economic growth momentum in Indonesia, which Bank Indonesia projects towards the lower end of the 5.0-5.4% range in 2019 before increasing towards the midpoint of the 5.1-5.5% range in 2020.
Indonesia's balance of payments is expected to improve in the third quarter of 2019, thereby reinforcing external resilience. Solid Balance of Payment (BOP) performance is backed by a capital and financial account surplus coupled with a manageable current account deficit. Portfolio investment recorded a net inflow of USD4.8 billion in the third quarter of 2019, induced by a promising domestic economic outlook and attractive domestic financial investment assets. Meanwhile, the current account deficit is predicted at a manageable level due to dwindling demand for imports and the impact of domestic policies to control imports, including the B-20 program. The position of reserve assets in Indonesia remains solid, recorded at USD124.3 billion at the end of September 2019, equivalent to 7.2 months of imports or 7.0 months of imports and servicing government external debt, which is well above the international adequacy standard of three months. Looking forward, Bank Indonesia projects a manageable current account deficit in 2019 and 2020 in the 2.5-3.0% of GDP range, supported by a maintained influx of foreign capital. In addition, Bank Indonesia will continue to strengthen policy synergy with the Government and other relevant authorities in order to increase external resistance, while attracting more FDI.
The Rupiah has strengthened again in line with maintained BOP performance. In October 2019, the Rupiah appreciated 1.18% (ptp) on the level recorded at the end of September 2019. Cumulatively from January until 23rd October 2019, therefore, the rupiah has appreciated 2.50% (ytd). The stronger Rupiah is supported by a well-functioning foreign exchange supply and demand mechanism from the business sector in addition to maintained foreign capital inflows. In addition, slightly less global financial market uncertainty has spurred positive sentiment concerning the Rupiah. Moving forward, Bank Indonesia predicts Rupiah exchange rate stability in line with the currency's fundamental value and maintained market mechanisms based on the sustained inflow of foreign capital to Indonesia congruent with the promising domestic economic outlook and attractive returns, as well as the positive impact of looser monetary policy in advanced economies. Bank Indonesia will continue to accelerate financial market deepening in the money market and foreign exchange market in order to support exchange rate policy effectiveness and strengthen domestic financing.
Low and stable inflation remains under control. Annually, headline inflation was recorded at 3.39% (yoy) in September 2019, down from 3.49% (yoy) the month earlier. Inflation was edged downwards by the Consumer Price Index (CPI) in September 2019, which recorded 0.27% (mtm) deflation after posting 0.12% (mtm) inflation the month earlier. Inflation was supported by controlled core inflation in line with anchored inflation expectations as a result of policy consistency by Bank Indonesia to maintain price stability, manage aggregate demand, ensure the exchange rate moves in line with the currency's fundamental value and minimise the impact of global prices. In addition, volatile foods (VF) recorded deflation on corrections to food prices and inflationary pressures on administered prices remained low, which also contributed to control inflation in the reporting period. Moving forward, Bank Indonesia will consistently maintain price stability and strengthen policy coordination with the central and regional governments to control inflation. Therefore, Bank Indonesia predicts inflation below the midpoint of the 3.5±1% target corridor in 2019 and subsequently maintained within the target range in 2020, namely 3.0±1%.
Effective monetary policy transmission has been underpinned by adequate liquidity in the banking industry combined with a stable and efficient money market. The average daily transaction volume on the interbank money market remained high in September 2019 at Rp17.95 trillion. Adequate liquidity was also maintained in the banking industry, as reflected by a ratio of liquid assets to deposits of 19.47% in August 2019, relatively stable compared with the 19.66% recorded in July 2019. Consequently, interbank rates faced declines on all tenors, including the overnight interbank rate as the operational target of monetary policy, which continued to converge on the policy rate at 5.24% in September 2019. The weighted average deposit rate fell 13 basis points on the previous period to 6.57% in September 2019. On the other hand, lending rates have also started to come down, primarily due to investment loans and working capital loans, which were recorded at 10.11% and 10.33% respectively in the reporting period. Meanwhile, growth of narrow money (M1) and broad money (M2) in August 2019, namely 6.59% (yoy) and 7.33% (yoy) respectively, was consistent with domestic economic growth. Bank Indonesia will continue to ensure adequate liquidity and increase efficiency in the money market, while strengthening transmission of the accommodative policy mix.
Financial system stability has been maintained despite the bank intermediation function requiring attention. This was reflected by a high Capital Adequacy Ratio (CAR) of 23.48% in August 2019, coupled with a low level of non-performing loans at 2.60% (gross) or 1.20% (nett). Public listed corporations maintained solid performance in line with sound repayment capacity, which further supported financial system stability. Notwithstanding, credit growth moderated from 9.58% (yoy) in July 2019 to 8.59% (yoy) in August 2019, primarily weighed down by restrained demand for corporate loans. On the other hand, deposit growth in August 2019 was recorded at 7.62% (yoy), down from 8.04% (yoy) in July 2019. Bank Indonesia believes the accommodative monetary and macroprudential policy mix will effectively stimulate credit growth without disrupting financial system stability. Therefore, Bank Indonesia projects growth of outstanding loans disbursed by the banking industry in the 10-12% (yoy) range in 2019 and 11-13% (yoy) in 2020, while projecting deposit growth in the 7-9% (yoy) range in 2019 and 8-10% (yoy) in 2020.
The payment systems, both cash and non-cash, remain uninterrupted. The position of currency in circulation grew 4.57% (yoy) in September 2019, while non-cash payment transactions using ATM/debit cards, credit cards and electronic money grew 5.71% in August 2019, dominated by ATM/debit cards with a 93.78% share. Impressive growth of e-money transactions was maintained in August 2019 at 230.25% (yoy) in line with greater public uptake of digital currency and broader e-money integration into the digital ecosystem. Bank Indonesia constantly strives to maintain an uninterrupted payment system in order to support development of the digital economy and finance. Furthermore, Bank Indonesia also advocates expanding the electronification program, particularly for local government transactions, and accelerating digital transformation in the financial sector through various initiatives."
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