The monthly policy meeting of Bank Indonesia was concluded one day after the US Federal Reserve decided - in line with expectations - to raise its key rate and announced it would soon start to reduce its balance sheet (bond holdings). As this decision was priced in it did not lead to significant capital outflows from Indonesia. Moreover, Indonesia is currently in a better position to deal with external shocks, reflected by record high foreign exchange reserves.

Bank Indonesia does still see several external and domestic risks. Externally, monetary tightening in the USA (will there be more FFR hikes this year and when will the Fed start to unwind its large balance sheet?), results of the UK election, the potential decline in commodity prices (especially crude oil), and geopolitical turmoil in several areas are regarded the risks, Bank Indonesia said in a statement. Domestically, the risks include the impact of administered price (AP) adjustments on inflation, coupled with ongoing consolidation in the corporate and banking sectors.

Regarding the global economy, Bank Indonesia sees an improvement despite the risks that need to be monitored. The global economic outlook is improving in line with favorable economic developments in the United States, China, Europe and Japan. Stronger consumption, investment and improving labor indicators have boosted US economic momentum (although US inflation remains low, below the target of the Fed), while the economy of China is expanding on the back of government and private sector investment. On the other hand, the uptick in growth in Europe and Japan was driven by exports and domestic demand. This faster global economic growth implies the global trade volume is also accelerating. Meanwhile, commodity prices are expected to continue their overall rise. However, there are potential downside risks linked to the abundant supply that is outpacing (still) limited global demand.

Economic growth of Indonesia improved in the first quarter of 2017, supported by export growth, stronger investment, and stronger household consumption. Export growth remains solid, in line with continuous recovery in the global economy as well as a hike in several commodity prices. Investment performance in Indonesia rose on the back of building investment, due to government infrastructure projects, private property sector, and non-building investment gains on activities in commodity and construction-based sectors. Meanwhile, household consumption is expected to remain strong, supported by Idul Fitri allowance disbursements for workers.

Regarding full-year economic growth of Indonesia in full-year 2017, Bank Indonesia sees growth in the range of 5.0 - 5.4 percent (y/y), supported by accelerating exports and investment performance as well as resilient household consumption.

Indonesia's balance of payments (BOP) is set to record another surplus in the second quarter of 2017, supported by a capital and financial account surplus. Furthermore, Indonesia's current account deficit is expected to remain under control at a healthy level. Indonesia's significant capital and financial account surplus has been supported by big foreign capital inflows in the form of portfolio investment and direct investment. Investors' positive perception of Indonesia is supported by the recent sovereign credit rating upgrade by Standard & Poor's as well as easing tensions after the 2017 Jakarta gubernatorial and Ahok's blasphemy case.

Non-resident capital inflows into Indonesia's financial markets at the end of May 2017 reached USD $9.0 billion (year-to-date). Consequently, the position of reserve assets at the end of May 2017 reached USD $124.95 billion, up from USD $123.25 billion in the preceding month. This is equivalent to 8.9 months of imports or 8.6 months of imports and servicing government external debt, well above the international standard of three months.

The Indonesian rupiah remained stable with low volatility, and slightly appreciating against the US dollar in line with foreign capital inflows. Stability is supported by large foreign capital inflows and a deeper financial market in Indonesia. Bank Indonesia is optimistic that foreign capital inflows, both in the form of foreign direct investment and portfolio investment, are expected to continue along with government structural reform and investor confidence in the national economic outlook.

Indonesian Rupiah versus US Dollar (JISDOR)

| Source: Bank Indonesia

Inflation remained under control in Indonesia and is still within the 2017 target corridor, namely 3 - 4 percent (y/y), despite inflationary pressures rising in May 2017 due to administered price adjustments (higher electricity tariffs) and volatile food prices. The Consumer Price Index (CPI) recorded inflation of 0.39 percent (m/m) or 4.33 percent (y/y) in May 2017, accelerating from 0.09 percent (m/m) or 4.17 percent (y/y) in the preceding month. Volatile foods and administered prices were cited as the main contributors to CPI inflation. Growing demand for several commodities during the approach to Ramadan in the fourth week of May heightened inflationary pressures on volatile foods, while persistently high administered price inflation was recorded at 0.69 percent (m/m), albeit down from 1.27 percent (m/m) in the month earlier. On the other hand, low core inflation was recorded at 0.16 percent (m/m), up slightly from 0.13 percent (m/m) in the preceding month.

Maintained banking industry resilience and stable financial markets continued to support a solid financial system in Indonesia. In April 2017, the Capital Adequacy Ratio (CAR) of the banking industry stood at 22.6 percent and the liquidity ratio at 21.6 percent, while non-performing loans (NPL) were recorded at 3.1 percent (gross) or 1.4 percent (net). The transmission of monetary and macroprudential policy easing continued but was squeezed by bank prudence in terms of managing the credit risks. Credit growth in April 2017 stood at 9.5 percent (y/y), up from 9.2 percent (y/y) the month earlier, driven by infrastructure loans, consumer loans and social services. In contrast, deposit growth moderated slightly from 10.0 percent (y/y) last month to 9.9 percent (y/y). Congruent with the expected economic gains and ongoing impact of previous monetary and macroprudential policy easing, credit and deposit growth are expected to accelerate in 2017 in the range of 10-12 percent and 9-11 percent, respectively.