The central bank of Indonesia (Bank Indonesia) kept its key interest rate (BI rate) at 7.50 percent for the tenth consecutive month as inflation is under control and well within the year-end target of the central bank (3.5-5.5 percent). The lending facility and deposit facility were kept at 7.50 percent and 5.75 percent, respectively, at Thursday’s Board of Governor’s Meeting (11/09). The central bank also expects that the current interest rate environment is capable of curbing the country’s wide current account deficit.
By keeping the BI rate relatively high, the central bank indicates that it prefers to safeguard macroeconomic stability instead of seeking higher economic growth, particularly as it sees several risks from abroad which can rock Indonesia's stability.
Despite lower labour force participation and declining productivity in the USA, the world’s largest economy shows expansion in manufacturing production and consumption. Therefore, the US Federal Reserve may raise interest rates in the second or third quarter of 2015.
Meanwhile, economic growth in the Eurozone slowed amid relatively weak domestic demand and fewer exports due to geopolitical tensions in the Ukraine-Russia region. The recent record low interest rate (0.05 percent from 0.15 percent) of the European Central Bank (ECB) in combination with an increase in purchases of asset-backed securities (an attempt to boost lending to small- and medium-sized companies in order to avert deflation in the Eurozone) are expected to bolster economic recovery in Europe and to generate liquidity excess on global financial markets.
Economic growth in emerging markets is estimated to be relatively limited, thereby pushing down commodity prices. Economic growth in China, the world’s second largest economy, is relatively stable, while growth in India has shown an improving trend. A number of Southeast Asian central banks raised policy rates in an effort to control inflation.
Regarding the domestic economy, Bank Indonesia detects:
• Economic growth continues to remain moderate with a 5.1-5.5 percentage point GDP growth projection for full-year 2014
• Household consumption followed a downward trend (lower retail sales and weaker motorcycle sales)
• Government consumption is expected to improve in the third and fourth quarter of 2014 in line with budget absorption capacity which tends to be low due to budget savings
• Investment is expected to pick up but remains limited amid limited export growth in line with sluggish emerging markets
• Import growth continues to decelerate as a result of moderating domestic demand
• The trade balance recorded a surplus at USD $0.13 billion in July 2014, primarily buoyed by a large non-oil & gas trade surplus (after a USD $0.29 billion deficit in the previous month). Looking ahead, the non-oil & gas trade balance is expected to improve due to an increase in exports as mineral exports of Freeport Indonesia and Newmont Nusa Tenggara can resume and the global economic recovery persists (despite the country’s oil & gas trade deficit expected to continue)
• The large influx of foreign capital has been maintained, supported by investors’ positive assessment of the domestic economic outlook. As of August 2014, foreign portfolio capital inflows to the financial markets in Indonesia have reached USD $14.4 billion. The country’s foreign exchange reserves have grown to USD $111.2 billion at end-August, equivalent to 6.5 months of imports or 6.3 months of imports and servicing foreign debt (well above international standards)
• The Indonesian rupiah exchange rate depreciated slightly (0.24 percent month to month) but volatility was mitigated. The weakening was caused by external sentiments (geopolitics, GDP growth China, and the possible US interest rates hike next year) as well as domestic sentiments (investors’ wait and see attitude toward future government policies, particularly the fuel subsidies)
• Indonesian inflation eased to 3.99 percent (year-on-year) in August 2014, the lowest rate in more than two years, and well within the central bank’s target for 2014
• The banking sector remained resilient with credit risk, liquidity risk and market risk well mitigated, supported by a strong capital base. The Capital Adequacy Ratio (CAR) remained high in July 2014 at 19.18 percent, well above the minimum threshold of 8 percent, while non-performing loans (NPL) were low and stable at around 2.00 percent. Furthermore, credit growth to the private sector decelerated to 15.0 percent (year-on-year) from 16.6 percent (year-on-year) during the previous month, in line with economic rebalancing process. Liquidity in the economy and banking sector was well maintained, evidenced by growth of M2 and third-party deposits at 11.0 percent (year-on-year) and 10.4 percent (year-on-year), respectively, in July 2014, as well as a decline in the money market rate due to an inflow of currency into the banking system. Moving forward, liquidity in the banking system is expected to remain adequate, in line with government financial expansion during the second half of the year. Furthermore, the capital market showed stronger performance in August 2014, indicated by the upward IDX Composite trend. Bank Indonesia will remain vigilant to the risks that may emerge from an increase in foreign debt by corporations