Tuesday, November 17, 2015

Indonesia holds rate, cuts RR, vigilant in easing policy

    Indonesia's central bank maintained its benchmark BI rate at 7.50 percent but lived up to its guidance from last month that it had room to ease its policy by lowering the reserve requirement by 50 basis points to 7.50 percent to "boost bank financing capacity to support escalating economic activity during the third quarter and beyond."
    Bank Indonesia (BI), which cut its rate by 25 basis points in February, also repeated its view from October that continued improvement in macroeconomic stability is "making room for monetary policy easing" and that it remains confident that inflation will be at the lower end of its target while the current account deficit is seen at 2 percent of Gross Domestic Product.
    However, BI is also acutely aware of the uncertain conditions in global financial markets from the expected increase in U.S. rates along with what it described as "the diversity of monetary policies form ECB, BoJ, and PBoC," and said it would "remain vigilant in easing its monetary policy," tempering any expectations for a series of rate cuts.
    The BI's guidance from October had raised expectations among some economists that it would ease its policy stance today while others had expected the BI to keep its policy steady given the concern that the rupiah's exchange rate could weaken in response to a rate cut, dealing a setback to the central bank's efforts to bring down inflation following a jump last year after the government cut fuel subsidies, pushing up fuel prices.
    Indonesia's inflation rate immediately jumped to 8.36 percent in December last year and has remained well-above the BI's target of 4.0 percent, plus/minus 1 percentage point this year.
    But in October the inflation rate eased to 6.25 percent from 6.83 percent in September, for a year-to-date rate of 2.16, BI said, adding that core inflation eased further to 5.02 percent in October, reflecting appreciation of the rupiah, limited domestic demand and anchored inflation expectations.
    Last month the rupiah appreciated after renewed optimism about the economic outlook for the country following new government policy packages, intervention by the BI to stabilize the currency, and what it described as a "dovish announcement" by the U.S. Federal Reserve in September.
    During the third quarter the rupiah appreciated on average by 5.35 percent to 13,873 to the U.S. dollar but it is still down 9.4 percent this year, trading at 13,737 today.
    Indonesia's economy expanded by an annual 4.73 percent in the third quarter, up from 4.67 percent in the second quarter, due to higher government spending, but sluggish growth in trading partners and low commodity prices "precipitated a deeper contraction in exports," BI said.
    Although it expects growth to continue in the fourth quarter as government infrastructure projects gains momentum, the BI said growth was projected "at the lower end of the 4.7-5.1% range for 2015. Last month the BI had only forecast growth in the 4.7 to 5.1 percent range.
    For 2016 growth is expected to increase to 5.2 to 5.6 percent.

    Bank Indonesia issued the following statement:

"The BI Board of Governors agreed on 17th November 2015 to hold the BI Rate at 7.50%, while maintaining the Deposit Facility rate at 5.50% and the Lending facility rate at 8.00%. The Board of Governors also decided to lower the primary reserve requirement in Rupiah from 8.0% 7.50, effective on 1st December 2015
Bank Indonesia considered that the macroeconomic stability has continued to improve, making room for monetary policy easing. Bank Indonesia is confident that the 2015 inflation will be maintained at the lower end of the 4±1% inflation target, with the current account deficit is projected at 2% of GDP. With the lingering uncertainty in the global financial market, stemming mainly from the expected Federal Funds Rate (FFR) hike as well as the diversity of monetary policies from ECB, BoJ, and PBoC, Bank Indonesia will remain vigilant in easing its monetary policy. In this respect, lowering the primary reserve requirement is expected to boost bank financing capacity to support escalating economic activity during the third quarter and beyond. Moving forward, Bank Indonesia will consistently maintain coordination with the Government in order to reinforce the structure of the economy, thereby facilitating stronger economic growth and preserving macroeconomic and financial system stability.
The global recovery remains uneven, while pressures on global financial markets demand vigilance. The US growth was moderate in line with limited manufacturing gains and a week export. Conversely, the labour sector showed signs of improvement, with lower unemployment along with rising income growth and nonfarm payroll. Consequently, such conditions reignited expectations of an imminent FFR hike in December 2015. The economic recoveries of Europe and Japan are still considered weak, driving the 2 countries to ease their monetary policies. China’s economic slowdown, as indicated by the PMI contraction along with a decrease in export, is also conducting monetarey policy easing. China’s government, in addition, is also conducting financial market reform, as well as renmimbi internationalisation. 
Economic growth accelerated in the third quarter of 2015, with the trend projected to continue into the fourth quarter. Third quarter growth was recorded at 4.73% (yoy), surpassing that posted last period at 4.67% (yoy). This was mainly due to stronger government consumption and investment, in line with significant progress in terms of government infrastructure projects. In addition, government capital spending increased by 38.8% by October 2015. Household consumption remains strong, as reflected by an improved purchasing power. From an external standpoint, however, persistently low commodity prices and sluggish growth in trade partner countries, such as the United States, China and Singapore, precipitated a deeper contraction in exports from Indonesia. By region, economic conditions on the island of Java improved, while limited growth was reported on Sumatra. Conversely, economic growth in Eastern Indonesia slowed, while Kalimantan experienced negative growth for the first time in a decade. Bank Indonesia expects the national economic grains to endure into the fourth quarter as government infrastructure projects gain momentum. Furthermore, private investment is predicted to increase due to the recent Government policy packages, including deregulations to support the investment climate. In general, domestic economic growth was projected at the lower end of the 4.7-5.1% range for 2015, and is expected to increase to 5.2-5.6% on 2016.
A sound non-oil and gas trade balance preserved the current account gains during the reporting period. The current account deficit in the Indonesia Balance of Payments (BOP) stood at USD4.0 billion (1.86% of GDP) in Q3/2015, improving from USD7.0 billion (3.02% of GDP) in Q3/2014 and USD4.2 billion (1.95% of GDP) in Q2/2015. The improvements stemmed from gains in the non-oil and gas trade balance as imports decreased sharply in line with limited domestic demand. On the other hand, non-oil and gas exports experienced a less pronounced decline due to lower commodity prices, despite positive growth in real terms. The oil and gas trade deficit remained stable as a smaller gas surplus was offset by a smaller oil deficit. Meanwhile, the Indonesia trade balance recorded a positive devolepment, with a surplus of USD1.01 billion in October 2015. Furthermore, the capital and financial account also maintained a surplus despite widespread uncertainty overshadowing global financial markets. The surplus declined, however, compared to the previous period and was insufficient to fully offset the current account deficit. Consequently, the position of reserve assets stood at USD100.7 billion at the end of October 2015, equivalent to 7.1 months of imports or 6.6 months of imports and servicing public external debt, which is well above the international adequacy standard of around three months.
The Rupiah rebounded after intense depreciatory pressures were felt in the third quarter. In Q3/2015, the Rupiah depreciated on average by 5.35% (qtq) to a level of Rp13,873 per USD due to external factors, namely concerns over the normalisation policy of the Federal Reserve as well as Yuan devaluation in China. Nonetheless, the Rupiah strengthened in October 2015 on positive sentiment for EM due to a dovish announcement relayed at the FOMC, coupled with optimism regarding the economic outlook of Indonesia after the Government released a series of policy packages and Bank Indonesia intervened on the foreign exchange market to stabilise the Rupiah. Rupiah appreciation averaged 4.47% (mtm) to a level of Rp13,783 per USD. Moving forward, Bank Indonesia will continue to maintain exchange rate stability in line with the currency’s fundamental value. 
The Consumer Price Index (CPI) experienced deflation in October 2015, bringing national inflation for the year to within the target corridor of 4±1%. Deflation was recorded at 0.08% (mtm) or 6.25% (yoy) in line with volatile food deflation after foodstuff prices were corrected due to increased supply. Consequently, inflation from January to October 2015 stood at 2.16% (ytd) or 6.25% (yoy). Volatile food deflation was backed by an increase in foodstuff supply. Furthermore, core inflation and administered prices were also considered low compared to historical trends. Core inflation was recorded at 0.23% (mtm) or 5.02% (yoy) in line with Rupiah appreciation, limited domestic demand and anchored inflation expectations. Administered price inflation remained low, contributed by cheaper diesel prices and the knock-on effect of lower 12 kg LPG canisters since September 2015. Based on conditions through to October 2015, Bank Indonesia confirmed that inflation in 2015 will fall towards the lower end of the 4±1% target, supported by strong policy coordination with the government to control inflation locally and nationally. In addition, low inflation through to October 2015 was also indicative of maintained price stability.
Financial system stability remained solid, underpinned by a resilient banking system and relatively stable financial markets. Banking industry resilience endured, with credit, liquidity and market risks well mitigated. In September 2015, the Capital Adequacy Ratio (CAR) remained well above the 8% minimum threshold at 20.4%, while non-performing loans (NPL) were low and stable at 2.7% (gross) or 1.3% (net). In terms of the intermediation function, credit growth was recorded at 11.1% (yoy), higher than that of the previous month, while deposit growth on September 2015 was recorded at 11.7% (yoy). Looking forward, credit growth is predicted to continue accelerating in line with an increase in economic activity and the looser macroprudential policy stance adopted by Bank Indonesia, along with the lower primary reserve requirement. "


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