Bank Indonesia Adopts 7-Day Reverse Repo, Kept at 5.25%
The central bank of Indonesia kept the BI seven-day reverse repo rate (7-day RR Rate) at 5.25 percent after its two-day August policy meeting (18-19 august 2016). At this policy meeting Bank Indonesia adopted the 7-day RR Rate as the nation's new benchmark monetary tool, replacing the BI rate that failed to influence markets significantly: despite the BI Rate having been cut from 7.50 percent to 6.50 percent so far this year, Indonesia's lending rates did not drop accordingly.
Meanwhile, Bank Indonesia kept the deposit facility rate at 4.50 percent, while it cut the lending facility rate to 6.00 percent. Earlier, the central bank had informed - regarding the deposit and lending facility rates - that it will keep a more symmetrical and narrow interest rate corridor, with the lower and upper ceiling at 75 bps below and above the BI 7-Day RR Rate.
Indonesia's banking industry expects that it will require some three months to feel the real impact of the newly adopted 7-Day RR Rate as it usually requires a long and gradual process for the banking industry to bring down interest rates. The 7-Day RR Rate means that Indonesia's central bank will sell securities with an agreement to buy them back within a seven-day period with the current interest rate at 5.25 percent.
Indonesia's central bank emphasized that it seeks domestic macroeconomic stability amid a still uncertain global economic context. Bank Indonesia will particularly continue to carefully watch possible changes in the monetary policy of the US Federal reserve. However, it does see room for further monetary easing at home as Indonesia's inflation is under control, the current account deficit has improved, while the Indonesian rupiah exchange rate has been strengthening so far this year (against the US dollar).
Given US Q2-2016 GDP growth was below projections due to weak investment data, the economic recovery of the world's largest economy remains plagued by uncertainty and therefore the Fed may only raise its Fed Funds Rate once this year. Meanwhile, moderate growth is expected to be seen in Europe and China. Economic growth in Europe remains overshadowed by the Brexit issue, while growth in China remains sluggish as public investment fails to stimulate an indebted private sector.
Positive news is that prices of several commodities have been strengthening over the past couple of weeks/months including coal, crude palm oil, and tin. Also crude oil, despite remaining low, has shown some signs of a rebound.
Although Indonesia's Q2-2016 GDP growth - at 5.18 percent (y/y) - is positive (on the back of rising public and private investment as well as household consumption), Bank Indonesia reminds that this growth was uneven from a regional and sectoral perspective. Indonesia's Q2-2016 economic growth mainly occurred on the islands of Java and Sumatra, while growth was mainly carried by the financial services and agricultural sectors. Indonesia's central bank also announced that it has cut its growth forecast for economic growth in Indonesia in full-year 2016 from the range of 5.0 - 5.4 percent (y/y) to the range of 4.9 - 5.3 percent (y/y).
Poll Indonesia Investments
Where do you see Indonesia's economic growth in full-year 2016?
Voting possible: -
- Between 5.0% - 5.2% (55%)
- Between 5.2% - 5.4% (19%)
- Below 5.0% (15.5%)
- More than 5.4% (10.5%)
Total amount of votes: 611