Thursday, May 19, 2016

Indonesia holds rate but says it may use room for easing

    Indonesia's central bank left its current and future benchmark rates steady, as expected, but signaled that it may return to the easing path by saying "room for monetary easing that has been opened may be used an an earlier time" provided the macroeconomy remains stable.
    Bank Indonesia (BI), which cut its rate by a total of 75 basis points in the first three months of the year, acknowledged that economic growth in the first quarter of this year was below its expectation and lowered its 2016 growth forecast to 5.0-5.4 percent from a previous forecast of 5.2-5.6 percent.
   The BI added that the transmission of its monetary policy was improving so preparations to reformulate its policy rate was continuing.
   In April the central bank said it would change its benchmark policy rate from the current 12-month BI rate, currently at 6.75 percent, to the BI 7-day (Reverse) Repo rate, currently at 5.50 percent.
    The new rate structure, which will take effect Aug. 19, also includes a symmetrical and narrower interest rate corridor where the floor (DF rate) and the ceiling (LF rate) will be 75 basis points below and above the 7-day reverse repo rate.
    The BI's guidance of possibly using room for monetary easing is new compared with its previous statement, a likely reaction to annual growth in the first quarter of this year that was 4.92 percent, below its forecast of 5.1 percent and down from 5.04 percent in the fourth quarter of last year.
    Although BI lowered its growth forecast for this year, it expects growth to rebound from the first quarter due to fiscal stimulus linked to accelerated infrastructure spending, a package of measures to boost competitiveness and improve the investment climate, and from its easier monetary policy.
     BI also said macroeconomic stability was "well maintained," referring to the inflation rate that remains within its target range of 4.0 percent, plus/minus 1 percentage point, an improving current account deficit and a relatively stable exchange rate.
    Indonesia's inflation rate eased to 3.6 percent in April from 4.45 percent in March and the central bank forecast inflation around the midpoint of its target range by the end of this year.
    Bank Indonesia issued the following statement:

"The BI Board of Governors agreed on 18-19th May to hold the BI Rate at 6.75%, while maintaining the Deposit Facility and Lending Facility rates at 4.75% and 7.25% respectively, effective May 20th 2016. Bank Indonesia also announced that the BI 7-Day (Reverse) Repo rate will be held at 5.5%. Consequently, Bank Indonesia’s term structure of monetary operations remains as follows:
Bank Indonesia considers the macroeconomic stability to be well maintained, as reflected by the inflation rate that remains within the target range of 4+1%, an improving current account deficit, and a relatively stable exchange rate. Monetary transmissions through the interest rate is improving, so are the preparations to implement the policy rate reformulation. Provided that the macroeconomic stability maintained in a stable condition, rooms for monetary easing that has been opened may be used at an earlier time. Furthermore, Bank Indonesia will constantly increase the intensity of policy coordination with the Government, to support economic sustainable growth by strengthening growth stimuli and accelerating structural reforms, thereby supporting sustainable economic growth while controlling inflation.
The global economy is projected to grow slower in 2016. The US recovery is not yet solid, as indicated by weak consumption and depressed employment indicators, as well as low inflation. The conditions are expected to push The Fed to act cautiously in adjusting the Fed Fund Rate (FFR). Congruently, limited growth continues to prevail in Europe, overshadowed by the Brexit. Meanwhile, Japan’s economy remains beset with various pressures. Such conditions perpetuated loose monetary policy in advanced countries, including the application of negative policy rates. In contrast, China’s economy has shown early signs of improvement, despite lingering risks, underpinned by the construction sector and real estate. On commodity markets, the oil price is expected to remain low due to abundant supply combined with weak demand. In contrast, however, the prices of several export commodities from Indonesia are rebounding, including crude palm oil (CPO), lead and rubber. 
On the home front, domestic economic growth in the first quarter of 2016 was lower than expeected, and predicted to rebound in the subsequent periods. Growth was recorded at 4.92% (yoy), attributed to limited growth of government consumption and private investment, amid the ecceleration of government capital spending. Conversely, household consumption maintained robust growth on the back of stable prices. Externally, export performance improved, along with improvements in several commodities. Economic moderation was felt in nearly all regions of Indonesia during the first quarter of 2016, with provinces reliant of natural resources experiencing contraction, namely East Kalimantan and Papua. Bank Indonesia projects economic growth to rebound in the upcoming periods, propped up by expanded and optimised fiscal stimuli linked specifically to accelerated infrastructure project development. Meanwhile, household consumption is also forecasted to gain momentum in line with mitigated inflation and higher income expectations. Congruously, the Government will also ramp up implementation of its recent policy package to boost competitiveness and enhance the investment climate, while a looser monetary policy stance should boost investment and exports. Consequently, robust economic growth is projected for 2016 in the range of 5.0-5.4% (yoy), which is down slightly from the previous projection of 5.2-5.6% (yoy).
The current account deficit narrowed in the first quarter of 2016, buoyed by a growing trade surplus. The current account deficit stood at 2.1% of GDP in the reporting period, down from 2.4% of GDP last quarter. A larger non-oil and gas trade surplus due to fewer non-oil and gas imports in line with limited domestic demand contributed to the narrower current account deficit. In general, non-oil and gas exports declined but shipments of several non-oil and gas commodities began to pick up. On the other hand, Indonesia’s trade balance recorded a surplus of USD0.67 billion in April 2016. Furthermore, the capital and financial account also posted a surplus in the first quarter of 2016 in line with persistently accommodative monetary policy in advanced countries and the promising domestic economic outlook. The capital and financial account surplus was supported by capital inflows in the form of portfolio investment and direct investment. Overall, the balance of payments (BOP) recorded a deficit in the reporting period, consistent with the narrower capital and financial account surplus. Nonetheless, the position of official reserve assets increased to USD107.7 billion, equivalent to 8.1 months of imports or 7.8 months of imports and servicing public external debt, which is well above international adequacy standards of three months. 
The rupiah remains stable. In the first quarter of 2016, the rupiah gained 3.96% (ptp) to close at a level of Rp13,260 per USD. Furthermore, the momentum was maintained into April 2016, appreciating 0.55% (ptp) to a level of Rp13,188 per USD. Domestically, the rupiah appreciated on the positive perception held by investors concerning the auspicious domestic economic outlook in line with maintained macroeconomic stability and optimism surrounding future economic growth. Such conditions are consistent with the lower BI Rate and government policy package to improve the investment climate, together with the accelerated implementation of infrastructure projects. In addition, the supply of foreign exchange by domestic export-oriented firms further supported rupiah appreciation. Externally, the rupiah strengthened as risk eased on global financial markets due to the delayed FFR hike and persistently loose monetary policy in several advanced countries. Moving forward, Bank Indonesia will continuously maintain exchange stability in line with the the rupiah’s fundamental value.
Low inflation was still observed in the reporting period, and expected to remain within the 2016 inflation target of 4±1%. The Consumer Price Index (CPI) recorded deflation of 0.45% (mtm) or 3.60% (yoy) in April 2016, stemming from administered prices (AP) and volatile foods (VF). Lower fuel prices, airfares and electricity rates contributed to AP deflation. Meanwhile, volatile foods (VF) posted deflation of 1.04% (mtm), or inflation of 9.44% (yoy) on an annualised basis. VF deflation stemmed primarily from lower foodstuff prices as the harvesting season persisted in several areas. On the other hand, relatively low core inflation was noted at just 0.15% (mtm) or 3.41% (yoy) due principally to exchange rate appreciation, anchored inflation expectations and limited domestic demand. Consequently, inflation at the end of 2016 is projected around the midpoint of the target. 
Financial system stability was maintained, underpinned by a resilient banking system and stronger financial markets. In March 2016, the Capital Adequacy Ratio (CAR) stood at 21.8%, while non-performing loans (NPL) ranged from 2.8% (gross) to 1.4% (net). In terms of the intermediation function, credit growth accelerated from 8.2% (yoy) the month earlier to 8.7% (yoy). Meanwhile, deposit growth decelerated from 6.9% (yoy) to 6.4% (yoy) over the same period. The transmission of loose monetary policy through the interest rate channel improved, evidenced by the banks again lowering their deposit and lending rates. Nonetheless, transmission through the credit channel have yet to reach optimum level, indicated by limited credit growth, despite accelerating slightly in March 2016."


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