Thursday, January 14, 2016

Indonesia cuts rate 25 bps, eyes on China slowdown

   Indonesia's central bank cut its benchmark BI rate by 25 basis points to 7.25 percent, saying this was in line with its previous statement that there was room to ease and "further easing will take place after rigorous assessment of the domestic and global economy, while maintaining macroeconomic and financial system stability."
    Bank Indonesia (BI), which cut its rate by 25 basis points in 2015, also said that uncertainty in global financial markets had diminished after the recent rate hike by the U.S. Federal Reserve but it was keeping a close eye on the risk related to a slowdown in China's economy and the continued decline in global commodity prices.
    Indonesia's inflation rate dropped to 3.35 percent in December from 4.89 percent in November, but within the government's 2015 target of 4.0 percent, plus/minus 1 percentage point.
    BI forecast that it will maintain inflation at the same target in 2016-2017 and then at the target of 3.5 percent, plus/minus 1 percentage point, in 2018.
    The central bank added that the country's economic growth in the fourth quarter of the year had not shown "significant improvement" in spite of fiscal stimulus and a relaxation of macro prudential policy, with export growth restrained due to weak global demand and a continued fall in commodity prices.
    In addition to the cut in the BI rate, the central bank also cut the overnight deposit and lending facility rates by 25 basis points to 5.25 percent and 7.75 percent, respectively.

    Bank Indonesia issued the following statement:

"The BI Board of Governors agreed on 13-14th January 2016 to lower the BI Rate 25 bps to 7.25%, with the Deposit Facility Rate and Lending Facility Rate held at 5.25% and 7.75% respectively. The decision was in line with Bank Indonesia’s prior statements that room for monetary easing exists on the back of solid macroeconomic stability, taking into consideration the reduced global uncertainty post-FFR hike. The reduction of the BI Rate is expected to support previous macroprudential policy easing and the lowering of primary reserves in rupiah. Further easing will take place after rigorous assessments of the domestic and global economy, while maintaining macroeconomic and financial system stability. Bank Indonesia will also strengthen coordination with the Government to control inflation, catalyse growth and accelerate structural reforms, thus supporting sustainable economic growth.
Global financial market uncertainties subsided after the Federal Reserve raised its Federal Funds Rate (FFR), while limited global economic growth was predicted. The successfully anticipated FFR hike on 17th December 2015, coupled with The Fed’s affirmation of a gradual and limited normalisation policy, did not trigger shocks on global markets. International commodity prices continued to slide, however, including the global oil price due to excess supply. Moderate US economic gains were reported, reflecting weak indicators of retail sales and personal expenditure, coupled with a manufacturing sector contraction. The recovery in Europe persisted, driven by domestic demand, but inflation remained low. Japan’s economy remained sluggish in line with weak consumption. Additionally, economic moderation was predicted to continue in China, notwithstanding the ongoing fiscal and monetary stimuli as well as supply-side reforms. The market’s reaction to China’s economic slowdown and its consistency in terms of financial market liberalization have placed additonal pressures on China’s stock markets. Moving forward, Bank Indonesia will continue to monitor the risks associated with economic moderation in China and falling international commodity prices.
Economic growth in Q4/2015 did not improve significantly, despite fiscal stimuli and macroprudential policy relaxation. Dwindling global demand and low commodity prices undermined exports. Domestic economic growth was recorded on the back of government consumption and greater investment, as government spending accelerated and more infrastructure projects were implemented. Private consumption remains stable, amidst indications of decreased savings and less disposable income. Private investment remains weak, following a decrease in commodity based-corporate performance and excess production capacity due to the domestic economic slowdown.
The Indonesia balance of payments is expected to improve in Q4/2015, supported by a capital and financial account surplus. The capital and financial account recorded a broader surplus as portfolio investment in government bonds, including global bonds, and other investments surged. The uptrend of investment was indicative of a promising domestic economic outlook combined with less uncertainty on global financial markets. Meanwhile, the current account deficit in 2015 is expected to improve from 3.1% to around 2% of GDP. The position of reserve assets at the end of December 2015 stood at USD105.9 billion, equivalent to 7.7 months of imports or 7.4 months of imports and servicing public external debt, which is well above the international adequacy standard of around three months.
The rupiah appreciated in December 2015 as uncertainty on global financial markets eased. Despite depreciating on average, point-to-point (ptp) the rupiah appreciated 0.36% (mtm) to a level of Rp13,785 per USD. Less uncertainty on global financial markets after the Fed hiked its Federal Funds Rate on 17th December 2015 increased non-resident funds to government bonds. Looking forward, Bank Indonesia will remain vigilant towards global developments, specifically China’s economy and international commodity prices, while keeping the Rupiah exchange rate in line with the currency’s fundamental value.
Inflation in 2015 was recorded at 3.35% (yoy), which is below that posted in 2014 but within the target corridor set by the government at 4±1%(yoy). Low inflation was attributed to Government and Bank Indonesia policy to control inflation, encompassing solid coordination between the national and regional inflation control teams. Core inflation was low at 3.95% (yoy) as a result of anchored expectations. Bank Indonesia played a key role in terms of managing domestic demand, maintaining exchange rate stability and anchoring inflation expectations. Inflation of volatile foods was recorded at 4.84% (yoy), which is low considering the ongoing severity of the El Nino weather phenomenon. Furthermore, close coordination between the Government and Bank Indonesia ensured smooth distribution and minimised food price distortions. Administered prices recorded low inflation of just 0.39% (yoy) as global energy prices fell against a backdrop of oil and gas reforms, achieved through adjustments to fuel prices and 12kg cylinders of LPG, as well as electricity rates. Consequently, inflation is projected to hit the target of 4±1% in 2016-2017 and 3.5±1% in 2018.
Financial system stability persisted, underpinned by a resilient banking system and relatively stable financial markets. In November 2015, the Capital Adequacy Ratio (CAR) was recorded at 21.1%, with non-performing loans (NPL) at 2.7% (gross) or 1.3% (net). In terms of the intermediation function, credit growth was recorded at 9.8% (yoy), lower than that posted in the same period of last year, in line with the economic downswing. Meanwhile, deposit growth was recorded at 7.7% (yoy) in November 2015. Moving forward, liquidity pressures from government financial operations and slower deposit growth, need to be anticipated. Bank Indonesia will continue to monitor and mitigate liquidity risks in order to maintain financial systems stability.
Bank Indonesia’s policy mix will remain focused on maintaining macroeconomic and financial system stability in 2016, while stimulating economic momentum. In the monetary sector, gradual monetary easing will remain consistent with efforts to maintain macroeconomic and financial system stability. Such policy will be supported by measures to maintain exchange rates in line with the rupiah’s fundamental value, strengthen the position of reserve assets and manage flows of foreign capital. Furthermore, Bank Indonesia will maintain accommodative macroprudential policy, while continuing financial market deepening. Payment system policy will be directed towards developing a more efficient domestic payment system industry, while expanding payment system electronification. Bank Indonesia will bolster the various ongoing measures through closer coordination with the Government and relevant institutions in order to maintain macroeconomic stability, strengthen the economic structure and support sustainable economic growth."


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