From February through November last year BI cut its rate five times by a total of 125 basis points to stimulate economic activity that was hit by measures to contain the spread of the virus.
In December last year and January this year BI then paused in its easing campaign amid signs of an economic rebound, inflationary pressure and growing talk about an unwinding of monetary stimulus.
But early this month it became clear Indonesia's economy was not rebounding as fast as expected as measures to prevent the spread of the pandemic had hit private consumption and investment.
"The BI Board of Governors agreed on 17th and 18th February 2021 to lower the BI 7-day Reverse Repo Rate by 25 bps to 3.50%, Deposit Facility (DF) rate by 25 bps to 2.75% and Lending Facility (LF) rate by 25 bps to 4.25%.The decision is consistent with projected low inflation and maintained exchange rate stability as well as follow-up efforts to support national economic recovery momentum. In addition, Bank Indonesia has also instituted policy measures in synergy with Financial System Stability Committee policy, as contain in the Integrated Policy Package to Increase Corporate Financing and Accelerate the Economic Recovery as follows:
- Maintaining rupiah exchange rate stabilisation policy in line with the currency's fundamental value and market mechanisms;
- Strengthening the monetary operations strategy to reinforce the accommodative monetary policy stance;
- Relaxing down payment requirements on automotive loans/financing to minimum 0% for all new motor vehicles to stimulate credit growth in the automotive sector, while maintaining prudential principles and risk management, effective from 1st March 2021 until 31st December 2021 (Attachment 1);
- Relaxing the Loan/Financing-to-Value (LTV/FTV) ratio on housing loans/financing to maximum 100% on all residential property (landed houses, apartments and shop houses/office houses) for banks meeting specific NPL/NPF criteria, and repealing regulations on the gradual liquidation of partially prepaid property to stimulate credit growth in the property sector, while maintaining prudential principles and risk management, effective from 1st March 2021 until 31st December 2021 (Attachment 2);
- Publishing the “Assessment of Policy Rate Transmission to Prime Lending Rates in the Banking Industry" to accelerate monetary policy transmission and expand the dissemination of information to corporate and individual consumers in order to enhance governance, market discipline and competition in the credit market (Attachment 3);
- Facilitating trade and investment promotion for productive sectors and tourism as well as socialising the use of local currency settlement (LCS) domestically and internationally in conjunction with other relevant institutions and stakeholders. In February and March 2021, a series of promotional and socialisation activities will be held in Japan, Singapore, Malaysia and Thailand as well as in Indonesia as part of the National BBI Movement that promotes pride in Indonesian-made products (Gernas BBI);
- Supporting development of an inclusive and efficient digital economy and finance ecosystem, specifically targeting SMEs, to drive the economic recovery, including Gernas BBI and the Indonesia Proud of Travelling Movement (GBWI) by;
- Extending the QRIS 0% merchant discount rate (MDR) for micro enterprises until 31st December 2021;
- Expanding QRIS acceptance to 12 million merchants in collaboration with payment system service providers as well as the central and local government;
- Encouraging collaboration between e-commerce, SMEs and the Government to strengthen the competitiveness of domestic SME products for the domestic and export markets.
Moving forward, Bank Indonesia will continue to direct all policy instruments towards supporting the national economic recovery, while controlling inflation and maintaining rupiah exchange rate stability and financial system stability. Furthermore, policy coordination with the Government and Financial System Stability Committee will constantly be strengthened, including implementation of the integrated policy package with a focus on efforts to overcome supply and demand-side constraints in terms of bank lending to the business community and priority sectors to support economic growth and national economic recovery.
The global economic recovery is expected to continue improving. This is in line with the current Covid-19 vaccination rollout in numerous countries to build herd immunity and increase mobility, coupled with ongoing fiscal and monetary policy stimuli. A stronger economic recovery recorded in advanced economies is primarily supported by the United States, as economic gains in China and India drive recovery in developing economies. Several positive indicators in January 2021 confirmed the global economic recovery is enduring. For example, the manufacturing and services Purchasing Managers Index (PMI) in the United States, China and India remained in an expansionary phase. In addition, retail sales in China and consumer confidence in India continue to grow. Consequently, global economic growth in 2021 is projected to reach 5.1%, upgraded from 5.0% previously. Consistent with the global economic gains, world trade volume and international commodity prices have continued to increase, thereby supporting stronger export performance in emerging markets, including Indonesia. Meanwhile, global financial market uncertainty should dissipate in line with improving expectations concerning the global economy. Global liquidity remains abundant and interest rates low as authorities maintain monetary policy stimuli. Such developments have sustained capital flows to developing economies and fuelled currency appreciation in various countries, including Indonesia.
The vaccination rollout and national policy synergy are expected to drive domestic economic recovery momentum moving forward. Indonesia's economy contracted 2.19% (yoy) in the fourth quarter of 2020 as mobility restrictions to break the domestic chain of Covid-19 transmission weighed heavily on private consumption and building investment. Although lower than previously projected, the national economy experienced a shallower contraction in the fourth quarter of 2020 compared with -3.49% (yoy) in the third quarter of 2020. For the year, therefore, the economy shrank 2.07% in 2020. Moving forward, domestic economic improvements will endure in line with the global economic recovery and expedited national vaccination program by the Government. Recent export gains affecting several commodities have been maintained, including crude palm oil (CPO), coal, iron and steel, along with several manufacturing products, such as organic chemicals, motor vehicles and footwear, which has boosted sectoral performance. Spatially, stronger export performance has also been recorded in several regions, specifically Sulampua (Sulawesi, Maluku, Papua), Java and Sumatra. Meanwhile, seeking to stimulate persistently weak domestic demand, Bank Indonesia has continued to strengthen national economic policy synergy, covering five salient aspects: (i) reopening productive and safe sectors; (ii) accelerating fiscal stimuli; (iii) stimulating bank lending on the supply and demand sides; (iv) maintaining monetary and macroprudential stimuli; and (v) accelerating economic and financial digitalisation, particularly in terms of SME development. Bank Indonesia projects national economic growth in 2021 in the 4.3-5.3% range, downgraded from 4.8-5.8% in line with the pace of economic growth realised in the fourth quarter of 2020.
Indonesia's Balance of Payments (BOP) remains solid, thereby reinforcing external sector resilience. Bank Indonesia predicts a Balance of Payments surplus in 2020, supported by a larger capital and financial account surplus and narrower current account deficit. The latest developments show that foreign capital inflows to domestic financial markets have been maintained, as reflected by a net inflow of portfolio investment totalling USD8.5 billion in the period from January until 16th February 2021. Meanwhile, the trade balance in January 2021 amassed a USD1.96 billion surplus, thus extending the surplus recorded since May 2020. Positive performance stemmed from 12.24% (yoy) export growth on the back of increasing demand in China, United States and Japan, as well as rising international commodity prices. The position of reserve assets at the end of January 2021 stood at USD138.0 billion, equivalent to 10.5 months of imports or 10.0 months of imports and servicing government external debt, which is well above the international adequacy standard of three months. Moving forward, Bank Indonesia projects a low current account deficit in the 1.0-2.0% of GDP range in 2021, therefore supporting external sector resilience in Indonesia.
Supported by Bank Indonesia's stabilisation measures and maintained foreign capital inflows to domestic financial markets, the rupiah continues to appreciate. As of 17th February 2021, the rupiah strengthened 0.22% on average, or by 0.07% (ptp) on the January 2021 level. A surge of foreign capital inflows to domestic financial markets in line with lower global financial market uncertainty and the positive perception of investors towards the promising domestic economic outlook have fed through to a stronger rupiah. Looking ahead, Bank Indonesia still expects the rupiah to regain lost value as the currency is fundamentally undervalued, supported by a narrow current account deficit, low and stable inflation, attractive domestic financial assets for investment, a lower risk premium in Indonesia as well as abundant global liquidity. In addition, Bank Indonesia will continue to strengthen rupiah exchange rate stabilisation policy in line with the currency's fundamental value and market mechanisms through effective monetary operations and by providing market liquidity.
Low inflation was recorded in 2020 in response to compressed demand and adequate supply. In January 2021, the Consumer Price Index (CPI) stood at 0.26% (mtm) or 1.55% (yoy), influenced by low core inflation at 1.56% (yoy) given weak domestic demand, Bank Indonesia policy to anchor inflation expectations as well as decreasing exchange-rate pass-through. Inflationary pressures on administered prices were also mild as airfares began to normalise after the yearend festive period. Meanwhile, volatile food inflation remained under control despite rising international food prices and restrained supply of several commodities. Inflation in 2021 is projected to remain under control within the 3.0%±1% target corridor. Bank Indonesia remains firmly committed to maintaining price stability and strengthening policy coordination with the Government through national and regional inflation control teams (TPI and TPID) in order to control headline inflation within the predetermined target range.
In line with Bank Indonesia's accommodative monetary policy stance and synergy with fiscal policy to stimulate economic recovery, loose liquidity conditions persist in the banking industry and financial markets. Commencing in 2020, Bank Indonesia has injected liquidity through quantitative easing to the banking industry totalling Rp750.38 trillion (4.86% of GDP), consisting of Rp726.57 trillion in 2020 and Rp23.81 trillion in 2021 (as of 16th February 2021). Synergy between monetary expansion and fiscal stimuli has been strengthened through SBN purchases by Bank Indonesia in the primary market. After making purchases in the primary market totalling Rp473.42 trillion to fund the 2020 State Budget, Bank Indonesia is continuing to purchase SBN in the primary market in 2021 to help fund the 2021 State Budget through mechanisms pursuant to the Joint Decree issued by the Minister of Finance and Governor of Bank Indonesia on 16th April 2020, which was subsequently extended on 11th December 2020 until 31st December 2021. As of 16th February 2021, Bank Indonesia has purchased SBN worth Rp40.77 trillion in 2021 in the primary market, including Rp18.16 trillion through private placement and Rp22.61 trillion through greenshoe options (GSO). Loose liquidity conditions in January 2021 have edged up the ratio of liquid assets to deposits to 31.64%, accompanied by solid 10.57% (yoy) deposit growth. In terms of monetary aggregates, M1 and M2 growth remained high in January 2021 at 18.7% (yoy) and 11.8% (yoy) respectively.
Interest rates are coming down in response to a lower policy rate and loose liquidity conditions, although the lag experienced in terms of lower lending rates in the banking industry demands attention. Loose liquidity coupled with the 125bps reduction to the BI7DRR in 2020 have contributed to a low overnight interbank rate, averaging 3.04%. The interest rate on 1-month term deposits fell 181bps in 2020 to record a level of 4.27% in December 2020. Notwithstanding, lending rates only decreased 83bps in 2020 to 9.70%. The lag is attributable to persistently high prime lending rates. In 2020, although the BI7DRR and 1-month deposit rate experienced large reductions, the prime lending rate only fell 75bps to 10.11%. This has given rise to a significant spread between the prime lending rate, BI7DRR and 1-month term deposit rate of 6.36% and 5.84% respectively. By bank group, the highest prime lending rate was recorded at state-owned banks totalling 10.79%, followed by regional government banks (9.80%), national private commercial banks (9.67%) and foreign bank branches (6.17%). In terms of loan type, prime lending rates on microloans currently average 13.75%, non-housing consumer loans (10.85%), housing loans (9.70%), retail loans (9.68%) and corporate loans (9.18%). Bank Indonesia is urging the banking industry to continue lowering lending rates expeditiously as part of the joint efforts to stimulate lending to the business community and for the national economic recovery.
Financial system resilience remains solid, although the risks associated with Covid-19 transmission on financial system stability continue to demand vigilance. The Capital Adequacy Ratio (CAR) in the banking industry remained high in December 2020 at 23.81%, accompanied by persistently low NPL ratios of 3.06% (gross) and 0.98% (nett). Despite loose liquidity conditions and high deposit growth of 10.57% (yoy), the intermediation function of the financial sector remains weak, as reflected by a 1.92% (yoy) credit contraction recorded in January 2021, nevertheless improving from -2.41% (yoy) in December 2020. Consequently, Bank Indonesia has revised down its credit/financing growth projection for 2021 from 7-9% to 5-7%. In response, several measures are rigorously strengthened through policy synergy with the Financial System Stability Committee, banking industry and business community to maintain optimism and overcome the supply and demand-side constraints impeding bank lending to the business community in order to stimulate national economic recovery momentum. Consistent with such policy synergy, Bank Indonesia has maintained an accommodative macroprudential policy stance by relaxing lending regulations in the property and automotive sectors to restore the intermediation function while safeguarding prudential principles and risk management. Bank Indonesia has also published an assessment of policy rate transmission to prime lending rates in the banking industry, which aims to expand the dissemination of information to corporate and individual consumers in order to enhance governance, market discipline and competition in the credit market, and simultaneously strengthen monetary policy transmission.
Cash and non-cash payment system transactions, including digital payments, are increasing in line with rapid economic and financial digitalisation. In January 2021, currency in circulation grew 12.09% (yoy) to reach Rp803.2 trillion. Transaction value using ATM cards, debit cards and credit cards stood at Rp621.7 trillion, shrinking 1.95% (yoy) in January 2021 due to limited mobility and weak domestic demand compressed by the Covid-19 pandemic. On the other hand, digital economy and finance transactions maintained solid growth in line with greater public acceptance and growing public preference towards online shopping, a surge of digital payments and acceleration of digital banking. Therefore, the value of electronic money transactions stood at Rp20.7 trillion in January 2021, expanding 30.71% (yoy). Similarly, in terms of digital banking, transaction volume and value growth remained robust at 39.65% (yoy) and 18.59% (yoy) to reach 475 million transactions and Rp2,649.7 trillion respectively. Bank Indonesia expects the digitalisation trend to accelerate, driven by rapid digitalisation and innovation as well as spatial and sectorial ecosystem expansion. Furthermore, Bank Indonesia continues to strengthen payment system policy to develop an inclusive and efficient digital economy and finance ecosystem and to strengthen national economic recovery momentum, amongst others, by expanding community-based QRIS acceptance to support the national economic recovery and SME development, including Islamic SMEs, along with the development of fast, convenient, affordable, secure and reliable retail payment system infrastructure to facilitate financial market efficiency and expansion as well as electronification of social assistance disbursements and government transactions. To strengthen rupiah use as the only legal tender in the territory of the Republic of Indonesia, Bank Indonesia continues to bolster public communication through several programs, namely Cinta Rupiah, Bangga Rupiah and Paham Rupiah, meaning to love the rupiah, be proud of the rupiah and understand the rupiah."
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