Thursday, November 19, 2020

Indonesia cuts rate 5th time on low inflation, stable FX

      Indonesia's central bank cut its interest rates for the 5th time this year, citing low inflation and external stability, including that of the rupiah's exchange rate.
      Bank Indonesia (BI) cut its benchmark 7-day reverse repo rate by another 25 basis points to 3.75 percent and has now cut it by 125 points this year following earlier cuts in February, March, June and July.
      As many other central banks in Asia, BI already switched into an easing cycle in 2019 in response to slowing global growth and has now cut the rate 9 times by a total of 225 basis points. 
      BI also lowered its deposit facility rate by 25 basis points to 3.0 percent and its leading facility rate by the same amount to 4.50 percent.
      "The decision is based on projected low inflation, maintained external stability as well as follow-up policy measures to expedite the national economic recovery," BI said, adding it would continue to monitor the impact of COVID-19 on the economic outlook "to determine the follow-up policy measures required to accelerate the national economic recovery program."
     BI reiterated its commitment to provide liquidity and support for the government's budget and was accelerating a deepening of the foreign exchange market by strengthening the domestic non-deliverable forwards market and maintaining an accommodative macroprudential policy stance by keeping the countercyclical buffer at zero, among other initiatives.
     After falling sharply in March, Indonesia's rupiah bounced back and erased most of the losses from April to May, and since then it has been largely steady and even firming this month.
     Today the rupiah was trading at 14,173 to the U.S. dollar, down 1.8 percent this year.
    Bank Indonesia issued the following statement:

"The BI Board of Governors agreed on 18th and 19th November 2020 to lower the BI 7-day Reverse Repo Rate by 25 bps to 3.75%, Deposit Facility (DF) rate by 25 bps to 3.00% and Lending Facility (LF) rate by 25 bps to 4.50%. The decision is based on projected low inflation, maintained external stability as well as follow-up policy measures to expedite the national economic recovery.  Bank Indonesia remains firmly committed to providing liquidity, including support for the Government in terms of accelerating state budget realisation in 2020.  In addition to the latest decision, Bank Indonesia has also implemented the following measures:
1.   Maintaining rupiah exchange rate stabilisation policy in line with the currency's fundamental value and market mechanisms.
2.   Strengthening the monetary operations strategy in order to reinforce the accommodative monetary policy stance.
3.   Accelerating foreign exchange market deepening by strengthening the domestic non-deliverable forwards (DNDF) market in order to increase liquidity, while deepening the financial markets as part of the Money Market Development Blueprint 2025.
4.   Maintaining an accommodative macroprudential policy stance by holding the countercyclical buffer (CCB) at 0%, the Macroprudential Intermediation Ratio (MIR) in the 84-94% range with a 0% disincentive parameter, the Macroprudential Liquidity Buffer (MPLB) at 6% with 6% repo flexibility, and the Loan-to-Value or Financing-to-Value (LTV/FTV) ratios on property loans/financing in line with prevailing regulations.
5.   Strengthening macroprudential policy to stimulate inclusive financing, in particular for small and medium enterprises (SMEs).
6.   Strengthening payment system digitalisation in order to build economic recovery momentum through several digital transformation initiatives, including:
a.   Expanding access for SMEs and the public to digital economic and financial services with the broad support of collaboration between the banking industry and FinTech throughout Indonesia.
b.   Expanding digital acceptance regionally by strengthening financial electronification policy synergy with all local governments and promoting broader acceptance of digital payments through the Quick Response Code Indonesia Standard (QRIS) campaign in all regions of Indonesia.
7.   Supporting the economic recovery through the following payment system policies:
a.   Extending the period of lower service fees for the National Clearing System (SKNBI), as well as the lower payment limit and late payment fees for credit cards.
b.   Reducing service fees for the Bank Indonesia – Real Time Gross Settlement (BI-RTGS) system.
Bank Indonesia will continue to monitor global economic and financial market dynamics as well as COVID-19 transmission and its impact on the economic outlook for Indonesia over time in order to determine the follow-up policy measures required to accelerate the national economic recovery program.  Furthermore, close policy coordination with the Government and Financial System Stability Committee will constantly be strengthened in order to maintain macroeconomic and financial system stability, while expediting the national economic recovery.
Global economic improvements have continued after recording stronger growth in the third quarter of 2020.  Economic growth began to regain upward momentum in many countries during the third quarter of 2020 on the back of increasing mobility and policy stimuli.  Positive economic growth was recorded in China, while economic gains in the United States, European Union and Japan exceeded preliminary projections.  Several early indicators in October 2020 pointed to ongoing global economic improvements, as reflected by increasing public mobility, further expansion of the manufacturing and services PMI in the United States and China, as well as growing consumer and business confidence in the United States and Europe.  The global economic gains are expected to endure in line with increasing public mobility and ongoing policy stimuli.  Stronger global economic performance has raised world trade volume and international commodity prices beyond previous projections.  Meanwhile, global financial market uncertainty has eased due to positive expectations concerning the global economic outlook together with less uncertainty surrounding the recent US election.  Such developments have boosted capital flows to developing economies and strengthened currencies in various countries, including Indonesia.
At home, domestic economic growth is rebounding in line with increasing fiscal stimulus realisation and greater public mobility together with stronger global demand.  Economic growth in Indonesia rebounded to 5.05% (qtq) in the third quarter of 2020 after contracting 4.19% (qtq) in the previous period, thereby reducing the contraction annually to 3.49% (yoy) from 5.32% (yoy).  Higher stimulus realisation and greater public mobility have gradually increased domestic demand in terms of consumption and investment.  Meanwhile, export performance has also improved on the back of global demand, in the United States and China in particular.  Ongoing domestic economic gains were also confirmed by positive developments in a number of indicators during October 2020, including public mobility, non-food and online retail sales, manufacturing PMI and private income.  Bank Indonesia expects economic growth to continue accelerating in 2021 in line with further global economic improvements, faster realisation of the central and local government budgets, progress in terms of the loan restructuring program as well as ongoing monetary and macroprudential stimuli issued by Bank Indonesia.  Through its policy mix, Bank Indonesia will continue to strengthen synergy with the Government and other relevant authorities to ensure the various policies taken are effective in stimulating economic recovery.
Indonesia’s Balance of Payments (BOP) remains solid, thus reinforcing external sector resilience. The BOP is predicted to record a surplus in the third quarter of 2020 as the capital and financial account returns to a surplus coupled with further current account improvements.  The trade surplus has also increased in line with strong export performance on the global economic recovery coupled with a rebalancing of imports as a corollary of muted domestic demand.  Meanwhile, the capital and financial account surplus was driven by maintained foreign capital inflows due to abundant global liquidity, highly attractive domestic financial assets for investment as well as maintained investor confidence in the domestic economic outlook.  The positive developments persisted in October 2020, supported by a USD3.61 billion trade surplus and sustained foreign capital inflows.  During the period from October until 16th November 2020, portfolio investment recorded a net inflow totalling USD3.68 billion.  The position of reserve assets in Indonesia at the end of October 2020 remained high at USD133.7 billion, equivalent to 9.7 months of imports or 9.3 months of imports and servicing government external debt, which is well above the international adequacy standard of three months.  Bank Indonesia projects a low current account deficit in 2020 at below 1.5% of GDP, which is also expected to remain under control in 2021, bolstered by external sector resilience.
Consistent with Bank Indonesia’s stabilisation measures and maintained foreign capital inflows to domestic financial markets, the rupiah is appreciating. As of 18th November 2020, the rupiah had appreciated 3.94% (ptp) on the October 2020 level, thus extending the 1.74% (ptp) gain recorded one month earlier or 0.67% on the average September 2020 level.  The value of the rupiah strengthened on increasing foreign capital inflows to domestic financial markets in line with lower global financial market uncertainty and positive investor perception regarding the promising domestic economic outlook.  As of 18th November 2020, therefore, the rupiah had recorded 1.33% (ytd) depreciation compared with the level at the end of 2019.  Looking ahead, Bank Indonesia still expects the rupiah to regain lost value as the currency is still 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.  Bank Indonesia will continue to hone 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.
Inflation remains low on weak domestic demand and adequate supply.  In October 2020, the Consumer Price Index (CPI) stood at 0.07% (mtm), thus bringing CPI inflation for the year to 0.95% (ytd) or 1.44% (yoy) annually, up slightly from 1.42% (yoy) in September 2020.  Furthermore, compressed domestic demand, policy consistency by Bank Indonesia to anchor inflation expectations to the target corridor, low international commodity prices and maintained exchange rate stability fed through to lower core inflation in the reporting period.  In terms of administered prices, mild inflationary pressures stemmed from lower electricity rates and further decreases to airfares.  In contrast, volatile foods experienced a build-up of inflationary pressures as a result of seasonal factors triggered by higher horticultural prices in the wake of the harvesting season.  Bank Indonesia projects headline inflation in 2020 below the lower bound of the target corridor before returning to the target range of 3.0%±1% in 2021. Bank Indonesia consistently maintains price stability and strengthens policy coordination with the central and local government to control inflation within the predetermined target.
In line with Bank Indonesia's accommodative monetary and macroprudential policy stance, liquidity conditions remain loose, prompting lower interest rates and stimulating economic financing. As of 17thNovember 2020, Bank Indonesia had injected around Rp680.89 trillion of additional liquidity through quantitative easing into the banking system, primarily in the form of lower reserve requirements totalling Rp155 trillion and monetary expansion totalling Rp510.09 trillion.  Loose liquidity conditions maintained a high ratio of liquid assets to deposits in October 2020 at 30.65%, coupled with a low overnight interbank rate of 3.29% in the reporting period. Loose liquidity and BI 7-Day (Reverse) Repo Rate reductions have contributed to lower deposit and lending rates from 5.18% and 9.44% in September 2020 to 4.93% and 9.38% respectively in October 2020. Furthermore, the benchmark 10-year SBN yield decreased from 6.58% at the end of October 2020 to 6.13% as of 18th November 2020. In terms of monetary aggregates, M1 and M2 growth accelerated in October 2020 to 18.5% (yoy) and 12.5% (yoy) respectively. Moving forward, monetary expansion by Bank Indonesia together with faster budget realisation and bank loan restructuring are expected to stimulate lending for the national economic recovery.
Bank Indonesia will strengthen monetary expansion synergy with fiscal stimuli by the Government in order to build national economic recovery momentum. Bank Indonesia continues its commitment to funding the 2020 state budget through SBN purchases in the primary market in accordance with Act No. 2 of 2020, through market mechanisms and private placement, as part of the efforts to accelerate the national economic recovery program, while maintaining macroeconomic stability. As of 17th November 2020, Bank Indonesia had purchased Rp72.49 trillion worth of SBN in the primary market through market mechanisms pursuant to the Joint Decree of the Minister of Finance and Governor of Bank Indonesia issued on 16th April 2020, including auction schemes, greenshoe options (GSO) and private placement. Meanwhile, funding realisation and burden sharing to fund public goods in the state budget by Bank Indonesia through private placement in accordance with the Joint Decree of the Minister of Finance and Governor of Bank Indonesia issued on 7th July 2020 currently stand at Rp270.03 trillion. In addition, Bank Indonesia has also realised burden sharing with the Government to fund non-public goods-SME totalling Rp114.81 trillion pursuant to the Joint Decree of the Minister of Finance and Governor of Bank Indonesia issued on 7th July 2020. Through such synergy, the Government can focus on accelerating state budget realisation in order to drive national economic recovery momentum.
Financial system stability remains solid, although the risks associated with COVID-19 transmission on financial system stability continue to demand vigilance.  The Capital Adequacy Ratio (CAR) remained high in the third quarter of 2020 at 23.41%, accompanied by persistently low NPL ratios of 3.15% (gross) and 1.07% (nett). Notwithstanding, the intermediation function of the financial sector remains weak due to subdued loan growth in line with compressed domestic demand and a selective banking industry, cautious because of the pandemic.  Growth of outstanding loans disbursed by the banking industry stood at 0.12% (yoy) in the third quarter of 2020, with deposit growth of 12.88% (yoy).  The latest developments point to a 0.47% (yoy) credit contraction in October 2020, with deposit growth of 12.12% (yoy). Moving forward, the bank intermediation function is expected to improve in line with the promising domestic economic recovery outlook.  Corporate performance is improving, as confirmed by increasing sales and repayment capacity in most sectors in the third quarter of 2020, which is expected to continue as the domestic and global economies gain momentum. Bank Indonesia will maintain an accommodative macroprudential policy stance, while continuously strengthening policy synergy and coordination with the Government and other relevant authorities to restore the bank intermediation function and stimulate economic recovery.
Cash and non-cash payment system transactions are increasing in line with the economic recovery, accompanied by rapid economic and financial digitalisation.  Growth of currency in circulation accelerated from 7.20% (yoy) in September 2020 to 14.61% (yoy) in October 2020, reaching Rp806.8 trillion. Similarly, transaction value using ATM, debit cards and credit cards recorded a shallower 3.97% (yoy) contraction in October 2020 compared with a 5.58% (yoy) contraction in September 2020. On the other hand, digital economy and finance transactions are proliferating rapidly in line with greater use of digital platforms and instruments during the pandemic, together with a shift in public preference and greater public acceptance of digital transactions. Growth of transaction value using electronic money remained positive in Octoberds 2020 at 14.80% (yoy). In terms of digital banking, transaction value growth also remained positive at 10.50% (yoy) in September 2020. Moving forward, Bank Indonesia acknowledges the importance of accelerating the current payment digitalisation trend through faster implementation of the Payment System Blueprint 2025 as well as expansion of financial electronification centrally and regionally.  Furthermore, Bank Indonesia will orient payment system policy towards strengthening economic recovery momentum by reducing payment infrastructure service fees and strengthening digital transformation through stronger bank collaboration with FinTech, and by expanding digital acceptance in all regions of the Indonesian archipelago."


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