Less than 24 hours after having raised the overnight deposit facility rate (known as Fasbi) by 25 bps to 4.25 percent, Indonesia's central bank (Bank Indonesia) also raised its benchmark interest rate (known as the BI rate) by 25 bps to 6.0 percent. Both these policy responses were conducted in order to support the IDR rupiah, which is one of the worst performing Asian currencies against the US dollar in 2013. Indonesia's central bank expects growing inflationary pressures as the Indonesian government intends to cut fuel subsidies this June.
Below Indonesia Investments presents Bank Indonesia's press release regarding the BI rate policy. This press release can also be accessed here.
In the Board of Governors' Meeting convened on June 13th, 2013, Bank Indonesia decided to increase the BI rate by 25 basis points (bps) to 6.00%, while maintaining the deposit facility and lending facility rates at 4.25% and 6.75%, respectively. The policy is part of Bank Indonesia’s policy mix to response pre-emptively to rising inflation expectations and to maintain macroeconomic stability and financial system stability amid increasing uncertainty in global financial markets. Bank Indonesia continues to stabilize the rupiah exchange rate in line with its economic fundamentals and maintains adequate liquidity in the foreign exchange market. Bank Indonesia will continue to strengthen its monetary operation by enhancing monetary instruments and financial market deepening, both in rupiah and foreign exchange. In addition, macro-prudential policies are being prepared to prevent excessive risks in certain sectors. Policy coordination with the Government will also be strengthened by focusing on the efforts to minimize inflationary pressure and to maintain macroeconomic stability as well as financial system stability.
Indonesia’s economic growth in Q2-2013 is projected to be revised downward to the lower bound of the earlier forecast range of 5.9%-6.1% amid the slowdown in the global economy. The continuing crisis in Europe and a slowdown in China's economy potentially lead to lower global economic growth. These conditions restrained the growth of exports and investment, especially non-construction investment. The source of Indonesia's economic growth is primarily driven by continuous strong household consumption and investment in construction.
On the external side, Indonesia's balance of payments (BOP) in Q2-2013 is expected to improve. This improvement is supported by a considerable surplus in the capital and financial account, despite a deficit in Q1-2013. Large surplus in the capital and financial account is supported by capital inflow, both in the forms of foreign direct and portfolio investments, in line with the positive perception on Indonesia's economic fundamentals and prospects. In the meantime, in accordance to its seasonal pattern, current account deficits in Q2-2013 is expected to be higher than that in Q1-2013. Export performance is still subdued with weak external demand and declining global commodity prices, while imports (including non-oil imports) continue to increase. International reserves at the end of May 2013 reached USD $105.1 billion, equivalent to 5.8 months of imports and government’s external debt services, above the adequacy level of international standards.
Rupiah depreciation pressure increased in May 2013. On point to point basis, the IDR rupiah depreciated by 0.74% (month to month) to IDR 9,795 per US dollar, or on average, it depreciated by 0.36% (month to month) to IDR 9,758. Pressure on the rupiah was associated with the reposition of financial assets from emerging markets in line with the possibility of monetary policy adjustment by the Fed and negative sentiment toward domestic fiscal and current account deficits. Pressure on exchange rates also occurred on most other Asian currencies. Bank Indonesia continues to maintain the stability of rupiah exchange rate in line with its economic fundamentals and provides adequate liquidity in the foreign exchange market.
Consumer Price Index (CPI) in May 2013 recorded a deflation in the midst of rising inflation expectation. CPI in May 2013 was recorded at -0.03% (mtm) or 5.47% (yoy) driven by volatile food deflation due to an improvement of the food supply. Core inflation also stayed at a low level (3.99%, yoy), in line with declining global commodity prices, stable exchange rate and adequate supply-side response. However, Bank Indonesia observes rising inflation expectation in anticipating Government policy on fuel subsidy. Administered prices are rising, triggered by second-phase effects of electricity tariff hikes and disruption on the supply of LPG. In addition to enhancing its policy mix, Bank Indonesia will strengthen policy coordination with the Government to address rising inflation expectation by maintaining adequate supply of food staples and mitigating secondary effect of the adjustment in the fuel price.
Financial system stability and banking intermediation functions were properly maintained. A solid banking industry performance is reflected in the high capital adequacy ratio (CAR) at 18.6%, which is well above the minimum capital requirement of 8%, and the low ratio of gross non-performing loans (NPL) at 1.96% in April 2013. Meanwhile, credit growth slowed down in April 2013 reaching 21.9% (yoy) in line with the decelerating domestic economy. Working capital and investment credits grew quite high at 23.0% (yoy) and 23.7% (yoy), while consumer credit grew 18.8% (yoy). Bank Indonesia envisages the credit growth rate is consistent with economic growth. However, Bank Indonesia observes continuous high credit growth in certain sectors, particularly in the property sector. Going forward, Bank Indonesia believes that the financial stability will be maintained with banking intermediary function at moderate level in line with decelerating Indonesia’s economic performance.
A complete report of the June 2013 Board of Governors’ Meeting, presenting macroeconomic developments and monetary policy will be published in the Monetary Policy Review (MPR). This publication is accessible through Bank Indonesia’s website.
Jakarta, June, 13th 2013