The central bank of Indonesia announced on Thursday (17/09) that it the country’s key interest rate (BI rate) at 7.50 percent, while maintaining the deposit facility rate at 5.50 percent and the lending facility rate at 8.00 percent. According to Bank Indonesia (BI) this decision is consistent with its efforts to push inflation towards the target corridor of 4±1 percent in both 2015 and 2016. In addition, the decision is also part of Bank Indonesia’s measures to anticipate possibilities of a Fed Fund Rate (FFR) hike.
In the near term, amidst an uncertain global economy, BI policy will continue to focus on rupiah stabilization measures by optimizing monetary operations on the rupiah and foreign exchange markets, strengthening forex supply and demand management, while continuing to deepen the money market. Furthermore, Bank Indonesia constantly strengthens its macro prudential and monetary policy mix in order to maintain macroeconomic stability, in particular exchange rate and financial system stability to bolster economic sustainability. Additionally, Bank Indonesia welcomes the government’s recent policy package, unveiled on 9 September 2015, aimed at propping up the flagging economy through structural reforms. Moving forward, Bank Indonesia will continue to strengthen policy coordination with the government in order to support effective and consistent structural policies as the key to a sound economic outlook in Indonesia.
Despite early indications of US economic momentum, global economic growth was weaker than previously projected. The global slowdown stemmed primarily from limited growth in emerging market countries, particularly China. The US economic growth is estimated to be higher than previously projected, gaining momentum on stronger consumption. Yuan devaluation, however, could undermine US exports, with inflation coming in below target. Consequently, uncertainty concerning the proposed FFR hike in the United States lingered, with the increase now expected towards the year end. Meanwhile, the economy of Europe was predicted to improve on robust domestic demand and future consumer confidence. In contrast, the Chinese economy continued to moderate despite ongoing improvements in the property sector. Limited growth was forecasted for Japan in line with sluggish domestic demand. Solid growth, however, was projected for India’s economy, with a bias towards the lower end of the range. In addition to uncertainty concerning the proposed FFR hike, global financial market risks also escalated due to China’s yuan devaluation and adopting a more flexible exchange rate regime
On the home front, the domestic economy is projected to accelerate in Q3-2015. Household consumption has shown signs of improvement, reflecting a surge in motorcycle sales. Investment is also expected to increase congruous with greater government investment as more infrastructure projects begin construction, such as toll roads, power stations and dams. Furthermore, higher cement sales, imports of capital goods and stronger credit growth are all indicative of increasing investment activity. Furthermore, the absorption of regional fiscal spending could potentially increase in line with special government measures. On the other hand, exports will continue to improve gradually as the global economy recovers. On an annualized basis, therefore, economic growth was projected in the 4.7-5.1 percent range for 2015 in line with consistent government structural reforms implemented through various economic policy packages and infrastructure projects.
The trade balance of Indonesia recorded a surplus in August 2015. Although lower from the previous period, the trade surplus in August stood at USD $0.43 billion. The decline stemmed from a narrower non-oil & gas trade surplus as imports surged of machinery and mechanical equipment, electrical equipment as well as iron and steel. The import growth of such commodities provided early indications of increasing economic activity. In addition, the oil & gas trade deficit narrowed on the month earlier as imports declined and exports increased. In terms of the financial account, despite growing pressure on foreign capital inflows as global uncertainty spread, accumulative foreign portfolio inflows to financial markets in Indonesia through to August 2015 totaled USD $3.4 billion. Consequently, the position of foreign exchange reserve assets at the end of August 2015 stood at USD $105.3 billion, equivalent to 7.1 months of imports or 6.9 months of imports and servicing public external debt, which is well above the international adequacy standard of three months.
The rupiah depreciated on the back of intense external pressures. On August 2015, the rupiah fell by an average of 2.9 percent (m/m) to a level of IDR 13,789 per US dollar. Pressures mainly originated from the yuan devaluation policy of the People’s Bank of China combined with uncertainty over the proposed FFR hike in the United States. Domestically, however, demand for US dollars surged in order to service foreign debt, which exacerbated the rupiah overshoot. Addressing the aforementioned developments, Bank Indonesia continued to intervene on the market through rupiah stabilisation measures in accordance with the currency’s fundamental value, thereby nurturing macroeconomic and financial system stability. In addition, Bank Indonesia also optimised monetary operations to manage demand and bolster foreign currency supply.
Indonesian Rupiah versus US Dollar (JISDOR):| Source: Bank Indonesia
Indonesian inflation fell in August 2015 on post-Eid-ul-Fitr price corrections. CPI inflation was recorded at 0.39 percent (m/m) or 7.18 percent (y/y) in August 2015 as a result of administered price deflation and controlled core inflation. Therefore, headline inflation for 2015 through to August stood at 2.29 percent (year-to-date). Core inflation was recorded at 0.52 percent (m/m) or 4.92 percent (y/y), up on the month earlier due to rising education fees and more expensive ready-to-consume foods. Inflationary pressures were controlled by anchored expectations and domestic economic moderation. Corrections to various transportation fares, especially airfares, intra-city fares and rail fares, contributed to administered price deflation. Meanwhile, volatile foods experienced inflation as the prices of various foodstuffs increased. Based on inflation through to August 2015, Bank Indonesia perceives the inflation target of 4±1 percent for 2015 as attainable through the backing of policy coordination to control inflation nationally and regionally.
Inflation in Indonesia:
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Source: Statistics Indonesia (BPS)
Financial system stability remained solid, underpinned by a resilient banking system and relatively stable financial markets. Banking industry resilience endured, with credit, liquidity and market risks well mitigated. The Capital Adequacy Ratio (CAR) remained strong, well above the statutory minimum of 8 percent at 20.5 percent in July 2015. Meanwhile, non-performing loans (NPL) were low and stable at 2.7 percent (gross) or 1.4 percent (net). In terms of the intermediary function, credit growth slowed to 9.7 percent (y/y), but escalated on August, estimated to reach 10.9 percent. In the meantime, deposit growth reached 14.6 percent (y/y) in July 2015. Credit growth was forecasted to increase in upcoming periods as economic activity escalates and Bank Indonesia loosens its macroprudential policy stance.
When will the Federal Reserve raise its Fed Fund Rate?
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