The central bank of Indonesia (Bank Indonesia) lowered its forecast for growth of Southeast Asia's largest economy in 2014 from the range of 5.8 - 6.2 percent to 5.5 - 5.9 percent as expansion of domestic consumption and exports are less robust than previously estimated. As such, Bank Indonesia implied that economic expansion of Indonesia will slow down further. Starting from 2011, gross domestic product (GDP) growth of Indonesia has declined steadily from 6.5 percent to 5.8 percent in 2013.

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Global credit rating agency Fitch Ratings reminded the investor community about the ongoing risk of a sudden reversal of capital inflows in Indonesia. In the first two months of 2014, capital inflows have been strong, reaching a total of USD $2.3 billion, a 16 percent increase from the same period last year, backed by renewed confidence in Indonesia's economic fundamentals as the current account deficit and inflation have moderated since the end of last year. However, several risks are looming causing potential volatility of capital flows.

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It was decided at the Board of Governors' Meeting (on 13 March 2014) to hold the benchmark interest rate (BI rate) at 7.50 percent, the lending facility rate at 7.50 percent and the deposit facility rate at 5.75 percent. The policy is consistent with ongoing efforts to guide inflation back towards its target corridor of 4.5±1 percent in 2014 and 4.0±1 percent in 2015, as well as to reduce the current account deficit to a more sustainable level. Recent developments indicate that the rate of inflation is under control and the current account deficit is shrinking.

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Credit growth in Indonesia's banking sector slowed in January 2014 to a growth pace of 20.9 percent (year-on-year), down from 21.4 percent (yoy) in the previous month. Total disbursed credit in January 2014 stood at IDR 3,287 trillion (USD 285 billion). The slowing pace of credit disbursement in Southeast Asia's largest economy is in accordance with the central bank's target to reduce credit growth in the banking sector to between 15 and 17 percent (yoy), said Agus Martowardojo, Governor of Bank Indonesia.

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Tomorrow (13/03), Bank Indonesia will hold its next Board of Governor's Meeting to discuss general policies in the monetary field. As usual, market participants are highly interested in the central bank's assessment of the country's economic fundamentals and interest rates policy. However, predictions about Bank Indonesia's stance toward its benchmark interest rate (BI rate) are mixed. Some expect it to be kept at 7.50 percent as inflation has been under control. Others anticipate a 0.25 percent hike due to the country's weak exports.

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The latest survey of Indonesia's central bank (Bank Indonesia) indicates that domestic private consumption and household consumption in Indonesia remain strong, evidenced by a 28.4 percentage growth (year-on-year) of retail sales in January 2014. This growth was particularly supported by strong sales of information and communication equipment. These sales rose 75 percent (yoy). Traditionally, Indonesia's private consumption accounts for about 55 percent of the country's total annual economic expansion.

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According to a recent survey of Schroder Investment Management Indonesia, subsidiary of the British multinational asset management firm and a leading independent international asset management and private banking group, Indonesian investors feel more confident to invest in Indonesia in 2014. Director of Schroder Indonesia Michael Tjoajadi stated that confidence of Indonesian investors has increased due to improving economic conditions and the long-term prospects of Southeast Asia's largest economy.

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Minister of National Development Planning (Bappenas) Armida Alisjahbana is optimistic that Indonesia's inflation rate will stay below the six percent mark in 2014. After seeing inflation ease to 7.75 percent (year-on-year) in February (from 8.22 percent in January), Alisjahbana in fact believes that inflation can be kept below 5.5 percent (just within the target range of Bank Indonesia). Limited inflation is important in the context of poverty eradication. The country's poverty rate is targeted to ease to 10.5 by the year-end.

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Indonesia's February 2014 HSBC manufacturing purchasing managers' index (PMI), which measures the performance of the country's manufacturing industry, slipped to 50.5 from 51.0 in the previous month, thus indicating slowing growth (a reading above 50 indicates expansion in manufacturing activity, while a reading below 50 indicates contraction). Despite continued strong export orders, domestic demand weakened amid massive floods and volcanic eruptions at the start of the year.

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On Monday (03/03, Statistics Indonesia announced that inflation in Indonesia stood at 0.26 percent in February 2014. The largest inflationary pressures in this month were caused by higher prices of instant food products, drinks, cigarettes and tobacco. The country's February inflation rate was much lower than the 1.07 percent inflation recorded in the previous month (which was brought on by severe floods that disrupted distribution networks). Year-on-year (yoy) inflation eased to 7.75 percent from 8.22 percent in January 2014.

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The central bank of Indonesia (Bank Indonesia) expects to see deflation in April 2016 on the back of controlled food prices as the harvest season has arrived. Bank Indonesia Governor Agus Martowardojo said a central bank survey shows deflation of 0.33 percent month-to-month (m/m) during the first three weeks of April. Besides lower food prices, Martowardojo also attributes April deflation to the government's decision to cut fuel prices (premium gasoline and diesel) by IDR 500 (approx. USD $0.04) per liter per 1 April. This move led to a 4 percent drop in public transportation tariffs.

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The central bank of Indonesia (Bank Indonesia) announced on Friday (15/04) it will adopt a new monetary tool per 19 August 2016 that is to replace the existing BI rate which is considered too inefficient to influence market liquidity as it is not directly tied to Indonesia's money markets. The seven-day reverse repurchase rate (reverse repo), which stood at 5.50 percent in the central bank's last auction, is to become the nation's new benchmark. Bank Indonesia Governor Agus Martowardojo, who communicated through a teleconference from Washington DC, emphasized that the central bank will not change its monetary stance.

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To assess Indonesia's purchasing power and consumer confidence it is always useful to take a look at car and motorcycle sales because when people are confident about their financial situation and have enough money to spend then they tend to buy cars and motorcycles (motorcycles are particularly popular among Indonesia's huge middle to lower-middle class segment). Meanwhile, cement sales inform about property and infrastructure development. Property development is also closely related to purchasing power and consumer confidence because property development grows when people's demand for property rises.

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The central bank of Indonesia (Bank Indonesia) expects to see deflation at 0.15 percent month-to-month (m/m) in February 2016. Bank Indonesia Governor Agus Martowardojo said lower (government) administered prices in combination with low core inflation will be the recipe for deflation in the second month of the year. The lower administered prices that are primarily the cause of deflation consist of fuel prices, air fares and 12-kilogram liquefied petroleum gas (LPG) canisters. In the first month of the year Indonesian inflation accelerated to 4.14 percent (y/y).

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Tomorrow (05/02), Statistics Indonesia is scheduled to release Indonesia's official full-year 2015 economic growth figure. Nearly all analysts expect to see a figure that reflects the continuation of slowing economic growth. Southeast Asia's largest economy expanded 5.0 percent in 2014 and this is expected to have eased further to 4.7 percent or 4.8 percent in 2015 on the back of (interrelated) sluggish global growth, low commodity prices, and weak export performance. Domestically, Indonesia has or had to cope with high interest rates and inflation (hence curtailing people's purchasing power and consumption as well as business expansion).

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New York-based financial services firm Standard & Poor's stated that Indonesia's banking industry will feel the negative impact of Indonesia's sluggish economic growth in combination with persistently low commodity prices next year. This combination may weaken profitability of the nation's banking industry. S&P puts Indonesia's economic growth in 2016 at 5 percent (y/y), below the International Monetary Fund's and World Bank's forecast as well as the central government's target, all at 5.3 percent (y/y).

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Today, the World Bank released the latest edition of its flagship publication Indonesia Economic Quarterly, entitled "Reforming amid Uncertainty". In this edition the Washington-based institution states that global conditions remain unfavorable despite financial markets having stabilized since October. Meanwhile, the country was negatively affected by severe man-made forest fires and toxic haze which cost Indonesia an estimated IDR 221 trillion (USD $16 billion or 1.9 percent of the country's gross domestic product) in five months.

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After having experienced two consecutive months of deflation in September and October, Indonesia is expected to see inflation again in November, primarily on higher food prices (chicken meat and rice). Agus Martowardojo, Governor of Bank Indonesia, expects an inflation rate of 0.2 percent (month-on-month) in November. This would mean that inflation in full-year 2015 is likely to reach 3 percent (y/y), in line with earlier estimates and within - or perhaps slightly below - Bank Indonesia's target range of 3 - 5 percent (y/y) of inflation in 2015.

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The central bank of Indonesia (Bank Indonesia) is expected to keep its benchmark interest rate (BI rate) relatively high in order to safeguard Indonesia's financial stability in 2016 (instead of seeking accelerated economic growth through a rate cut). Despite easing pressures on inflation and the country's current account balance, Bank Indonesia Governor Agus Martowardojo said that persistent global uncertainty (referring to the looming US Fed Fund Rate hike and China's slowdown) justifies the tight monetary stance.

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As Indonesia's inflation rate has eased to 6.25 percent (y/y) in October 2015 from 6.83 percent (y/y) in the previous month, and given that Indonesian inflation will ease more markedly in the last two months of 2015 as the impact of the subsidized fuel price hike in November 2014 will vanish, the central bank of Indonesia (Bank Indonesia) seems to have more scope to cut its current relatively high benchmark interest rate, hence giving rise to accelerated economic activity.

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