Thursday, July 18, 2019

Indonesia cuts rate 25 bps, sees space for further cuts

     Indonesia's central bank lowered its interest rates 25 basis points to encourage bank lending and boost the economy and signaled it is ready to lower rates further as there is "adequate space for accommodative monetary policy in line with low inflation expectations and the need to further stimulate economic growth."
     Bank Indonesia's (BI) cut its key BI 7-day reverse repo rate to 5.75 percent, its deposit rate to 5.0 percent and its lending facility rate to 6.50 percent, as widely expected.
     "This policy is consistent with low inflation expectations and the need to build economic growth momentum amidst a backdrop of easing global financial market uncertainty and controlled external stability," BI said.
     BI raised its rates six times last year by a total of 1.75 percentage points during the U.S. Federal Reserve's four rate hikes to bolster the exchange rate of the rupiah against a rising U.S. dollar.
     But the Fed's shift toward easier policy this year has stimulated investors' interest in emerging market assets and boosted the rupiah, giving BI space to lower its own rates without fear of capital outflows and financial instability.
     Today's rate cut follows BI's 50 basis points cut to its rupiah reserve requirements in June.
     "Ongoing trade tensions continue to pressure world trade volume and undermine global economic growth," BI said, adding slower global growth has amplified downside pressure on commodity prices, including oil, with easier monetary policy by central banks lowering financial market uncertainty and driving capital flows to developing economies.
     The rupiah has been one of the main beneficiaries of this shift in capital and has been rising against the U.S. dollar since November last year.
      Today the rupiah rose further to 13,960 to the dollar, up 4.3 percent this year and up 9 percent since Oct 31, 2018, boosted by an upgrade of its sovereign rating.
     BI said it expects the inflow of foreign capital to further strengthen the rupiah.
     Indonesia's economy slowed in the first quarter as exports declined and BI said further stimulation of domestic demand, including investments, was "required in order to mitigate the adverse impact of global economic moderation."
     Indonesia's gross domestic product grew 5.07 percent in the first quarter of this year, down from 5.18 percent in the fourth quarter of last year, but BI confirmed it still expects growth this year below the midpoint of 5.0-5.4 percent.
     In addition to the rate cut, BI said it would institute a policy mix in cooperation with the government and other authorities to boost exports and tourism and attract foreign direct investment.
     Indonesia's current account deficit, one of the reasons behind last year's rate hikes, is expected widen in the short run as exports decline but further ahead it is expected to narrow this year to 2.5-3.0 percent of GDP from almost 3.0 percent in 2018 as foreign capital is attracted.
      Indonesia's inflation rate eased slightly to 3.28 percent in June from 3.32 percent in May and BI reiterated it still expects inflation this year to be below the midpoint of its target corridor of 3.5 percent, plus/minus 1 percentage points.

     Bank of Indonesia issued the following statement:

"The BI Board of Governors agreed on 17th and 18th July 2019 to lower the BI 7-day Reverse Repo Rate by 25 bps to 5,75%, Deposit Facility (DF) rates lowered 25 bps to 5,00% and Lending Facility (LF) rates lowered 25 bps to 6,50%. The policy is consistent with low inflation expectations and the need to build economic growth momentum amidst a backdrop of easing global financial market uncertainty and controlled external stability. The monetary operations strategy remains oriented towards ensuring adequate liquidity in the money market and strengthening the transmission of accommodative monetary policy. Bank Indonesia is maintaining an accommodative macroprudential policy stance to encourage bank lending and expand economic financing. In addition, Bank Indonesia constantly strengthens payment system policy and financial market deepening to support economic growth. Moving forward, Bank Indonesia perceives adequate space for accommodative monetary policy in line with low inflation expectations and the need to further stimulate economic growth. Moreover, Bank Indonesia will continue to strengthen coordination with the Government and other relevant authorities in order to maintain economic stability and catalyse domestic demand, while boosting exports and tourism as well as attracting foreign capital inflows, including Foreign Direct Investment (FDI). 
Ongoing trade tensions continue to pressure world trade volume and undermine global economic growth.Flatter growth is predicted in the United States as exports decline due to simmering trade tensions, the fading effect of fiscal stimuli and restrained economic confidence. Growth has also slowed in Europe as a result of sluggish exports coupled with the ongoing structural issue of an aging population, which is undermining domestic demand. Declining exports and weaker domestic demand are also plaguing the economies of China and India. Global economic moderation, in turn, has amplified downside pressures on commodity prices, including oil. Several central banks in advanced and developing economies have responded to the inauspicious economic dynamics by relaxing monetary policy, including the US Federal Reserve, which is expected to lower the federal funds rate (FFR). The prevailing policy response has reduced global financial market uncertainty and driven foreign capital inflows to developing economies.
At home, Indonesia has maintained relatively stable economic growth in the second quarter of 2019 compared with conditions in the previous period. Private consumption remains solid, backed by maintained consumer confidence. Furthermore, building investment continues to expand at a stable pace. Meanwhile, exports from Indonesia are expected to contract on subdued global demand and lower commodity prices stemming from the ongoing trade dispute, although steel exports increased in June 2019. The impact of simmering trade tensions on lower exports has been felt in a number of countries. In Indonesia, the export contraction has impeded imports and undermined nonbuilding investment. Moving forward, efforts to stimulate domestic demand, including investment, are required in order to mitigate the adverse impact of global economic moderation. In general, Bank Indonesia projects national economic growth in Indonesia below the midpoint of the 5.0-5.4% range in 2019. In addition, Bank Indonesia will institute a policy mix in cooperation with the Government and other relevant authorities in order to build economic growth momentum.
Indonesia is expected to maintain Balance of Payment (BOP) performance in the second quarter of 2019, thus reinforcing external stability. BOP performance is supported by a larger capital and financial account surplus than previously projected. Foreign capital inflows in the form of foreign direct investment and portfolio investment are expected to record a significant surplus, drawn to Indonesia by a sound domestic economic outlook and attractive domestic financial investment assets. Foreign capital inflows in the form of portfolio investment as of June 2019 were recorded at USD9.7 billion. Meanwhile, the current account deficit is projected to widen as exports of goods and services decrease, exacerbated by seasonal trends to repatriate dividends and service interest payments on external debt. Indonesia's trade balance in June 2019 recorded a USD0.196 billion surplus, down slightly from USD0.22 billion the month earlier. At the end of June 2019, the position of reserve assets was recorded at USD123.8 billion, equivalent to 7.1 months of imports or 6.8 months of imports and servicing government external debt, which is well above the international adequacy standard of three months. Looking ahead, Bank Indonesia projects a narrower current account deficit in 2019 compared with conditions in 2018, namely in the 2.5-3.0% of GDP range. Furthermore, Bank Indonesia will constantly strengthen policy synergy with the government and other relevant authorities in order to bolster external resilience, including efforts to attract FDI.
A stronger rupiah has reinforced external stability. In June 2019, the rupiah appreciated 1.04% (ptp) on the level recorded at the end of May 2019 and by 1.13% compared with the May average in 2019. Rupiah appreciation continued into July 2019, reaching 1.06% (ptp) on 17th July 2019 compared with conditions at the end of June 2019. The stronger rupiah was triggered by attractive returns on portfolio investment in domestic financial assets. In addition, the prevailing perception of Indonesia's economic outlook is improving, especially after Standard & Poor’s (S&P) upgraded Indonesia's sovereign rating and uncertainty eased on the global financial markets in line with the expected loosening of global monetary policy. Such developments are expected to maintain the current inflow of foreign capital to Indonesia and further strengthen the rupiah. Moving forward, Bank Indonesia predicts rupiah exchange rate stability in line with market mechanisms. To support exchange rate policy effectiveness and strengthen domestic financing, Bank Indonesia will continue to accelerate financial market deepening efforts, targeting the money market and foreign exchange market in particular.
Low and stable inflation was maintained in June 2019. Consumer Price Index (CPI) inflation stood at 0.55% (mtm) or 3.28% (yoy) in June 2019, down slightly on the previous period at 0.68% (mtm) or 3.32% (yoy). Furthermore, core inflation was also kept under control in line with policy consistency by Bank Indonesia to anchor rational inflation expectations, including maintaining rupiah exchange rates in line with the currency's fundamental value. Administered prices (AP) recorded deflation in the reporting period as airfares were readjusted after the peak festive period. Inflationary pressures on volatile foods were controlled as the seasonal impact of Ramadan and Eid-ul-Fitr began to fade. Bank Indonesia constantly strengthens policy coordination with the central and local governments to ensure low and stable inflation, including in anticipation of an earlier and protracted dry season forecasted this year. Bank Indonesia projects inflation in 2019 below the midpoint of the target corridor, namely 3.5%±1%.
Financial system stability has been maintained amidst a backdrop of adequate liquidity and lower credit risk. Solid bank resilience was confirmed by a high Capital Adequacy Ratio (CAR) of 22.3% in May 2019, coupled with a low level of non-performing loans (NPL) at 2.6% (gross) or 1.2% (nett). The banking industry has also maintained adequate liquidity, as reflected by a ratio of liquid assets to deposits of 18.5% in May 2019, although it declined from 20.2% in April 2019. The intermediation function remains sound with the banking industry reporting credit growth in May 2019 at 11.1% (yoy), which is stable compared to the month earlier. On the other hand, the banks confirmed a moderate uptick in deposit growth to 6.7% in May 2019 from 6.6% in April 2019. Bank efficiency also improved recently, as indicated by a low BOPO efficiency ratio recorded at a level of 81.71% in May 2019. Meanwhile, the performance of public listed corporations remains healthy, buoyed by maintained repayment capacity. Moving forward, Bank Indonesia will maintain an accommodative macroprudential policy stance in order to foster credit growth in line with the sub-optimal credit cycle. In 2019, Bank Indonesia projects growth of outstanding loans disbursed by the banking industry in the 10-12% (yoy) range, with deposit growth expected in the 8-10% (yoy) range.
The payment systems, both cash and noncash, remain uninterrupted. In terms of cash payments, growth of currency in circulation decelerated to 1.4 % (yoy) in June 2019. The wholesale (RTGS) and retail (Clearing) non-cash payment systems also functioned well in the reporting period. Meanwhile transactions using ATM/debit cards, credit cards and electronic money expanded at 22.6% (yoy) in May 2019, dominated by ATM/debit cards with a 94.4% share and expanding 21.6% (yoy) in the reporting period. Electronic money continues to enjoy significant uptake, with growth reaching 262.6% (yoy). Online transactions via digital banking recorded slightly faster growth at 34.5% (yoy) compared with conditions the month earlier. The proliferation of electronic money and digital banking is in line with the ongoing shift in public preferences towards transacting with financial technology platforms (FinTech), e-commerce and electronic money in the transportation sector. Moving forward, Bank Indonesia will continue to expand the payment systems’ role in supporting economic growth. Furthermore, Bank Indonesia will continue contributing to accelerate economic transformation in Indonesia towards digital finance; to expand the electronification program, especially targeting social aid programs (bansos), integrated transportation modes and local government transactions in an attempt to increase efficiency and economic capacity; and to transform micro, small and medium enterprises (MSME) towards digital payment platforms, digital finance and e-commerce. Bank Indonesia is also currently preparing the FATF (Financial Acton Task Force) Mutual Evaluation for 2020 as part of the National Strategy Action Plan for 2019 in order to mitigate money-laundering risk in the payment system."


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