Although Bank Indonesia (BI) maintained its benchmark 7-day reverse repo rate at 4.50 percent, it left little doubt it will cut the rate if needed, saying there is "adequate space to lower the policy rate due to mild inflationary pressures and the urgent need to stimulate economic growth."
BI has already lowered its benchmark rate twice this year by 50 basis points following cuts in February and March. Today it also left the rates on its deposit and lending facilities at 3.75 and 5.25 percent, respectively.
In another lengthy statement, BI laid out its latest steps in countering the threat from the spread of the coronavirus, or COVID-19, to the stability of financial markets and economic growth.
"The risk of global economic recession will peak in the second and third quarters of 2020, mirroring the COVID-19 pandemic, with a recovery expected to begin in the fourth quarter of 2020," BI said.
Indonesia's economy is expected to mirror the global path due to the impact of disruptions to global supply chains, the fall in global demand and commodity prices, with the economic downturn peaking in the second and third quarters before upward momentum in the fourth quarter of this year.
Due to the decline in domestic demand from lower household incomes and investment, BI now expects domestic growth of around 2.3 percent this year and then a significant rebound in 2021, mirroring the expected global economic recovery.
On March 19 BI cut its 2020 growth forecast to 4.2-4.9 percent from an earlier forecast of 5.1-5.5 percent and 2019's growth of 5.02 percent.
Last month BI also forecast a rebound to growth of 5.2-5.6 percent in 2021 but it didn't mention this forecast in today's statement.
Today's initiatives by BI include strengthening "the intensity" of its triple intervention policy, which refers to interventions in the spot and domestic non-deliverable forward foreign exchange markets "to stabilize and strengthen rupiah exchange rates," along with its purchases of government securities, including sharia bonds, in the secondary market.
After plunging almost 14 percent from March 1 to March 23, the rupiah has bounced back in the last week on an influx of foreign capital and a US$60 billion repo agreement with the Federal Reserve, and rose further today to around 15,651 to the U.S. dollar.
But the rupiah it is still down 11 percent since the start of the year.
"Bank Indonesia is confident that the current value of the rupiah is adequate to support economic rebalancing, as the currency is fundamentally undervalued," BI said, adding its expects the currency to strengthen toward 15,000 per U.S. dollar at the end of 2020.
"To support national economic recovery efforts from the deleterious COVID-19 impact, Bank Indonesia will increase monetary easing through quantitative easing," it said.
So far this year BI has already injected liquidity to money markets and banks totaling nearly 300 trillion rupiah through the purchase of 166 billion of government securities, by injecting more than 56 trillion in liquidity to the banking system through term repos, by lowering the rupiah reserve requirement for some banks on April 1 which added 22 trillion of liquidity, and lowering the foreign currency reserve requirement, boosting liquidity by some US$3.2 billion.
The steps BI is taking today include expanding its monetary operations by providing banks and corporates with 1-year term repos in which government securities can be used as collateral, lowering the reserve requirement by 200 basis points for conventional banks and by 50 basis points for Islamic banks as of May 1, and relaxing the additional demand deposit obligations to meet the macro prudential intermediation ratio by one year.
To strengthen liquidity management in the banking industry and in relation to the lower reserve requirement, BI raised the macroprudential liquidity buffer (MLB) by 200 basis points for conventional banks and by 50 points for Islamic banks as of May 1, with banks required to meet this additional buffer through the purchase of government securities in the primary market.
BI also said it was adjusting some of its payment system policy instruments to increase the uptake of non-cash payments to help ease the COVID-19 impact, including relaxing some of the rules for credit card payments, including minimum payment requirements and penalties for late payments, and supporting government programs to accelerate non-cash social aid disbursements by expediting the electrification of some social programs.
Bank Indonesia issued the following statement:
"The BI Board of Governors agreed on 13th and 14th April 2020 to hold the BI 7-Day Reverse Repo Rate at 4.50%, while also maintaining the Deposit Facility (DF) and Lending Facility (LF) rates at 3.75% and 5.25%.The decision considers the need to maintain external stability amidst heightened global financial market uncertainty, while Bank Indonesia perceives adequate space to lower the policy rate due to mild inflationary pressures and the urgent need to stimulate economic growth.
1. To stabilise and strengthen rupiah exchange rates, Bank Indonesia has strengthened the intensity of triple intervention policy through the spot and Domestic Non-Deliverable Forward (DNDF) markets, as well as purchasing SBN in the secondary market.
2. To support national economic recovery efforts from the deleterious COVID-19 impact, Bank Indonesia will increase monetary easing through quantitative easing as follows:
a. Expand monetary operations by providing banks and the corporates a term-repo mechanism with SUN/SBSN underlying transactions of tenors up to one year.
b. Lower the rupiah reserve requirement ratios by 200bps for conventional commercial banks and by 50bps for Islamic banks/Islamic business units, effective from 1st May 2020.
c. Relax the additional demand deposit obligations to meet the Macroprudential Intermediation Ratio (MIR) for conventional commercial banks as well as Islamic banks/Islamic business units for a period of one year, effective from 1st May 2020.
3. To strengthen liquidity management in the banking industry and in relation to the lower rupiah requirements, Bank Indonesia has raised the Macroprudential Liquidity Buffer (MLB) by 200bps for conventional commercial banks and by 50bps for Islamic banks/Islamic business units, effective from 1st May 2020. The banking industry is required to meet the additional MLB through purchases of government issued SUN/SBSN in the primary market.
4. To increase the uptake of non-cash payment instruments in order to mitigate the COVID-19 impact, Bank Indonesia is increasing various payment system policy instruments as follows:
a. Supporting government programs to accelerate non-cash social aid program (bansos) disbursements to members of the public in conjunction with payment system service providers by expediting the electronification of relevant social programs, including the Family Hope Program (PKH), Noncash Food Assistance Program (BPNT), Pre-Employment Card and Smart Indonesian Card (KIP).
b. Increasing public socialisation activities in collaboration with payment system service providers to increase the uptake of non-cash payment instruments through digital banking, electronic money and broader QRIS acceptance.
c. Relaxing credit card policy by lowering the upper limit for credit card interest, minimum payment requirements and the penalties for late payments, while supporting credit card issuer policy to extend the due date for customers.
Further clarification concerning the lower reserve requirements, higher MLB ratio and credit card policy is provided in the attachment to this press release.
Bank Indonesia's policy mix is part of the policy synergy coordinated closely with the Government as well as through the Financial System Stability Committee as well as other relevant authorities to maintain macroeconomic and financial system stability, while striving to recover the national economy from COVID-19. Bank Indonesia will continue to monitor economic and global financial market dynamics as well as the spread of COVID-19 and its economic impact on Indonesia over time, while implementing the coordinated follow-up policies required with the Government and Financial System Stability Committee to maintain macroeconomic and financial system stability, and supporting the national economic recovery.
The COVID-19 pandemic has spread to all corners of the world and intensified the risk of a global economic recession in 2020, while its impact on global financial market panic is gradually subsiding. The risk of a global economic recession in 2020 has increased due to compressed demand and production disruptions caused, amongst others, by limited individual mobility and other restrictions to reduce COVID-19 transmission. Congruently, economic contraction is predicted in advanced economies for 2020, including the United States and various countries in Europe, despite ultra-accommodative fiscal and monetary policies. In addition, the economic growth outlook for developing economies has also been downgraded. The risk of global economic recession will peak in the second and third quarters of 2020, mirroring the COVID-19 pandemic, with a recovery expected to begin in the fourth quarter of 2020. In 2021, world economic growth is expected to rebound strongly due to the various policies implemented worldwide in addition to the base effect. Meanwhile, global financial market panic, which peaked in March 2020, has begun to subside in line with positive sentiment concerning the global policy response. Global financial market risk has faded, as confirmed by a decline in the VIX volatility index from a level of 85.4 on 18thMarch 2020 to 41.2 on 14th April 2020.
Global economic decline and the spread of COVID-19 in Indonesia are expected to hamper domestic economic growth momentum. Exports in 2020 are predicted to decline on compressed global demand, global supply chain disruptions and low international commodity prices. Meanwhile, social restrictions to contain COVID-19 have eroded private incomes and reduced production, thus lowering domestic demand in the form of household consumption and investment. Domestic economic moderation in Indonesia is projected to peak in the second and third quarters of 2020, mirroring the anticipated global economic contraction and economic impact of COVID-19 containment measures. Notwithstanding, the national economy is expected to regain upward momentum in the fourth quarter of 2020, with overall growth for the year projected around 2.3% before increasing significantly in 2021. In addition to the expected global economic improvements, the national economic recovery will also be driven by various policies implemented by the Government, Bank Indonesia and other relevant authorities.
A narrow current account deficit is projected. Despite an export decline on dwindling demand and lower international commodity prices, the trade balance is expected to improve due to a deeper import contraction on falling domestic demand as well as less demand for production inputs for export activities. Furthermore, a narrower services trade deficit is also expected due to lower import transportation costs and lower-than-projected tourism receipt. The primary income account deficit has also reduced in line with shrinking foreign holdings of domestic financial instruments. Overall, the current account deficit is projected below 1.5% of GDP in the first quarter of 2020. Meanwhile, foreign capital inflows are expected to gradually return to Indonesia as global financial market panic continues to ease and the domestic economy gains momentum. Overall, the solid BOP outlook will reinforce external sector resilience in Indonesia. At the end of March 2020, the position of reserve assets stood at USD121.0 billion, equivalent to 7.2 months of imports or 7.0 months of imports and servicing government external debt, which is projected to increase at the end of April 2020. Bank Indonesia is confident that the current position of international reserves is more than adequate to meet imports, service government external debt and stabilise rupiah exchange rates.
The rupiah regained some of its lost value in the second week of April 2020 as global financial market panic began to subside. On 13th April 2020, the rupiah appreciated 4.35% (ptp) on the level recorded at the end of March 2020. Notwithstanding, the rupiah has still depreciated by around 11.18% on the level recorded at the end of 2019. The rupiah appreciated in April 2020 in response to an influx of foreign capital flows to domestic financial markets after various policies were implemented around the world to mitigate the economic impact of COVID-19, including in Indonesia. The stronger rupiah was also supported by the maintained supply of foreign exchange from domestic players, which underpinned rupiah exchange rate stability. Bank Indonesia is confident that the current value of the rupiah is adequate to support economic rebalancing, as the currency is fundamentally undervalued. Furthermore, rupiah stability is expected as the currency strengthens towards Rp15,000 per US dollar at the end of 2020. Moving forward, Bank Indonesia will continue to bolster rupiah stabilisation policy in line with the currency's fundamental value and market mechanisms. To that end, Bank Indonesia will increase the intensity of triple intervention policy through the spot and Domestic Non-Deliverable Forward (DNDF) markets, as well as purchasing SBN in the secondary market. To boost the effectiveness of exchange-rate policy, therefore, Bank Indonesia will continue to optimise monetary operations in order to ensure sound market mechanisms and adequate liquidity in the money and foreign exchange markets.
Inflation remains low, thus supporting economic stability. CPI inflation in March 2020 was recorded at 0.10% (mtm), down from 0.28% (mtm) the month earlier, influenced by weak demand and adequate goods supply, including food, as well as a smooth distribution chain. By component, low headline inflation stemmed from controlled core inflation as well as deflation of volatile foods and administered prices. Core inflation, excluding gold, remains under control due to policy consistency by Bank Indonesia to anchor rational inflation expectations to the target corridor, together with low exchange-rate pass-through. Gold prices were edged up by international gold prices in line with higher demand as a safe haven asset during this period of heightened global financial market uncertainty. Meanwhile, volatile food deflation was accounted for by price corrections affecting several commodities, such as various chili varieties, fresh fish, garlic and cooking oil. In addition, further corrections to airfares contributed to the deflationary pressures on administered prices. Consequently, annual CPI inflation in March 2020 remained under control at 2.96% (yoy), down marginally from 2.98% (yoy) in February 2020. Going forward, Bank Indonesia will consistently maintain price stability and strengthen policy coordination with the central and local governments to control low and stable inflation in the 3.0%±1% range in 2020 and 2021.
Effective transmission of the accommodative monetary policy stance is supported by adequate liquidity in the banking industry. Monetary policy transmission through the interest rate channel to the money market remains effective, as reflected by a further 150bps decline in the overnight interbank rate to 4.34% and a 166bps decrease in the 1-week Jakarta Interbank Offered Rate (JIBOR) to a level of 4.58% since the end of June 2019, prior to the policy rate (BI7DRR) reductions initiated in July 2019. Meanwhile, transmission of lower interest rates to deposit rates and lending rates in the banking industry continued in February 2020. Consequently, the weighted average deposit rate from the end of June 2019 to February 2020 fell 67bps to 6.16%, with the average lending rate on working capital loans falling 35bps to 10.07%. Monetary policy transmission through the interest rate channel is supported by Bank Indonesia's policy response to maintain adequate liquidity in the banking system. Thus far in 2020, Bank Indonesia has injected liquidity to the money market and banking industry totalling nearly Rp300 trillion through various policy measures, including: (i) purchasing Rp166 trillion of SBN in the secondary market; (ii) injecting liquidity to the banking industry totalling more than Rp56 trillion through a term-repo mechanism with underlying SBN transactions held by the banking industry; (iii) lowering the rupiah reserve requirement by another 50bps, effective from 1st April 2020, generating Rp22 trillion of additional liquidity, after lowering the reserve requirements in 2019 and at the beginning of 2020, which already added around Rp53 trillion of liquidity; and (iv) lowering the foreign currency reserve requirement by 4% to increase foreign currency liquidity in the banking industry by around USD3.2 billion. The policy response taken by Bank Indonesia maintained adequate liquidity in the money market and banking industry, as reflected by a high average daily transaction value in the interbank money market in March 2020 at Rp12.8 trillion, together with a high ratio of liquid assets to deposits of 22.81% in February 2020. Bank Indonesia will continue to ensure adequate liquidity and enhance money market efficiency, while strengthening transmission of the accommodative policy mix. In addition, Bank Indonesia is also confident that the latest round of fiscal stimuli introduced by the Government will further strengthen the effective transmission of liquidity injections by Bank Indonesia to the real sector.
Financial system stability has been maintained, although the potential risks associated with the COVID-19 impact on macroeconomic and financial system stability must still be anticipated. Financial system stability was reflected by a high Capital Adequacy Ratio (CAR) of 22.27% in February 2020, coupled with a low level of non-performing loans (NPL) at 2.79% (gross) and 1.04% (nett). A softening in the domestic economy and increasing economic uncertainty due to the COVID-19 pandemic has undermined demand for new loans and increased cautious and selective bank lending. Bank Indonesia will focus macroprudential policy measures on efforts to maintain financial system stability and anticipate potentially higher risks in the financial sector due to COVID-19. Coordination with financial authorities and relevant government ministries/agencies will constantly be improved in terms of formulating an optimal policy mix and to mitigate escalating risk in the financial system.
Payment system availability, both cash and non-cash, remains uninterrupted. The position of currency in circulation accelerated to 7.53% (yoy) in March 2020 in anticipation of growing demand for cash during the COVID-19 containment period. Meanwhile, non-cash transactions using ATM/debit cards, credit cards and electronic money in February 2020 were observed to decrease in line with less economic activity. Nevertheless, payments using digital transactions in March 2020 are expected to increase as a consequence of growing demand for digital financial and economic transactions during the period of mobility restrictions. Bank Indonesia appreciates the various efforts of players in the digital economy and finance to promote the use of non-cash payments, while backing government programs to disburse social aid program assistance through non-cash channels. Such efforts have not only supported day-to-day economic activities yet also increased economic efficiency. In conjunction with payment system service providers, Bank Indonesia will strengthen digital transformation for the Indonesian economy through implementation of the Indonesia Payment System Blueprint 2025, including broader QRIS acceptance amongst MSME merchants and traditional markets, education facilities, social institutions and places of worship."
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