Thursday, July 10, 2014

Indonesia holds rate as inflation continues to ease

    Indonesia's central bank maintained its benchmark BI rate at 7.50 percent, as expected, saying this policy stance is consistent with its effort to steer inflation toward its target corridor of 4.5 percent, plus/minus one percentage point, in 2014 and the 2015 target corridor of 4.0 percent, plus/minus one percentage point, and its efforts to reduce the current account deficit to a more sustainable level.
    Bank Indonesia (BI) has held rates steady since November 2013 after raising them by 175 basis points last year in response to inflationary pressures. Indonesia's inflation rate eased to 6.7 percent in June from 7.32 percent in May, continuing the decline seen since 8.79 percent in August 2013.

    BI issued the following statement:
"It was decided at the Bank Indonesia Board of Governors’ Meeting, convened on 10th July 2014, to maintain the BI Rate at 7.50%, with the Lending Facility and Deposit Facility rates held respectively at 7.50% and 5.75%. Such policy is consistent with efforts to steer inflation towards the target corridor of 4.5±1% in 2014 and 4.0±1% in 2015, as well as to reduce the current account deficit to a more sustainable level. Bank Indonesia assures that macroeconomic stability will be maintained amidst domestic economic rebalancing. Moving forward, however, there remain a number of external and domestic risks that demand vigilance in order to successfully achieve the inflation target and improve current account performance. To that end, Bank Indonesia will tirelessly strengthen its monetary and macroprudential policy mix, coupled with policy measures to reinforce the structure of the domestic economy and manage external debt, particularly corporate external debt. In addition, Bank Indonesia will also tighten policy coordination with the Government in terms of inflation control and managing the current account deficit in order to shore up the economic rebalancing process, thereby maintaining increasingly sustainable growth momentum looking ahead.

The global economic recovery persisted but at a slower pace than previously projected. Which is related to revised down US growth figures along with actual US GDP data in the first quarter of 2014 as a result of the North American cold wave. Although lower than previous estimates, the global recovery endured, underpinned by economic gains in advanced countries as monetary stimuli linger. Meanwhile, emerging market countries tended to cool off, primarily attributable to economic rebalancing in China. Congruently, commodity prices continued to slide. Looking forward, several global economic risks will be monitored, including the downswing in China and the normalisation policy of the Federal Reserve.
The domestic economy continued to slump during the first quarter of 2014. Despite solid growth, household consumption slowed, as reflected in retail and motor vehicle sales figures, amongst others. Government consumption also decelerated due to postponement of 13th salary disbursements until the third quarter of the year along with decreased spending by government ministries and institutions. Furthermore, investment growth also slowed, especially construction investment as a result of stabilisation policy. Conversely, non-construction investment surged on the back of export performance in the manufacturing sector, amongst others. Overall, external sector performance remained weak, undermined by exports of coal and minerals. Although export performance as an aggregate tailed off, manufactured exports (non-natural resources) tended to improve, especially transportation equipment, supported by ongoing economic recoveries in advanced countries and early indications that Indonesia is becoming a dependable motor vehicle production base for leading markets in ASEAN, Japan and other Asian countries.
The trade balance recorded a moderate surplus, stemming predominantly from the non-oil/gas account. A surplus trade balance of USD0.07 billion was registered in May 2014, contributed by a surplus non-oil/gas account that offset the expanding oil and gas account deficit. A decline in non-oil/gas imports compared to the previous quarter, in line with moderating domestic demand due to ongoing stabilisation policy, prompted the non-oil/gas surplus. In contrast to non-oil and gas imports, oil imports have swelled since 2010. From a financial account standpoint, foreign capital inflows ebbed slightly in June 2014 as investors wait for the results of the 2014 Presidential Election to be announced. Accumulatively, however, up to June 2014 the flow of foreign portfolio into domestic financial markets amounted to USD11.54 billion. Consequently, the position of foreign exchange reserves in Indonesia at the end of June 2014 increased to USD107.7 billion, equivalent to 6.2 months of imports or 6.0 months of imports and servicing external debt, which is well above minimum international adequacy standards of around three months.
Depreciatory pressures on the rupiah escalated during the reporting month, with the currency depreciating by 3.03% (mtm) from the preceding month to Rp11,892 per US dollar. Point to point (ptp), the rupiah depreciated 1.52%, closing at a level of Rp11,855. In addition to persistent uncertainty on global financial markets and the trade deficit in April 2014, the wait-and-see attitude of investors towards the election also influenced the exchange rate. Moving forward, Bank Indonesia will continue to maintain exchange rate stability in line with its fundamentals.
Inflation in June 2014 was relatively well controlled in accordance with seasonal trends. Headline inflation increased 0.43% (mtm) or 6.70% (yoy) in June 2014 in the run up to the holy fasting month and Eid-ul-Fitr. Annually, however, inflation continued to decline. Inflation during the approach to Ramadan was credited to volatile foods, amounting to 1.06% (mtm) or 6.74%. Meanwhile, core inflation was controlled and relatively stable at 0.25% (mtm) or 4.81% (yoy). On the other hand, the inflation of administered prices increased moderately to 0.45% (mtm) or 13.47% (yoy) due to a correction in the electricity tariff for households with a power supply capacity of 6,600 VA and above. Bank Indonesia will continue to monitor inflation risks stemming from seasonal trends as religious festivals approach as well as other risks, such as potential pressures on administered prices and rising food prices in the wake of El Nino. In anticipation of such risks, Bank Indonesia will strengthen coordination with the Government in terms of inflation control, especially through the Inflation Control Team along with regional inflation control teams, to steer inflation towards its target corridor of 4.5±1% in 2014 and 4.0±1% in 2015.
Tenacious banking system resilience and relatively well-maintained financial market performance precipitated steadfast financial system stability. Banking industry resilience remained sound with credit risk, liquidity risk and market risk well mitigated, bolstered by a solid capital base. In May 2014, the Capital Adequacy Ratio (CAR) remained high at 19.51%, well in excess of the statutory minimum of 8%, while Non-Performing Loans (NPL) were low and stable at around 2.00%. Credit growth to the private sector decelerated in May 2014 to 17.4% (yoy) from 18.5% (yoy) in the previous month in line with the domestic economic rebalancing program. Bank Indonesia will continue coordinating with the Financial Services Authority (OJK) to guide future credit growth that supports healthier and more balanced economic expansion. Meanwhile, the Indonesia Stock Exchange experienced a 0.3% correction in the reporting month to a level of 4,878.58. On the other hand, the performance of tradeable government securities slumped as investors wait for the results of the 2014 Presidential Election.


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