Bank Indonesia Unexpectedly Cuts Key Rate to 4.75%

The Bank Indonesia unexpectedly cut its key interest rate by 25 bps to 4.75 percent at its October 20th, 2016 meeting following a 25bps cut in September. The central bank also lowered its lending facility rate by 25bps to 5.5 percent and reduced its overnight deposit facility rate by 25bps to 4.0 percent. Markets were expecting the central bank to stand pat on monetary policy. Policy makers said that the decision aims to boost growth and lending.
Bank Indonesia | Yekaterina Gucshina | 10/20/2016 10:41:47 AM
Excerpt from the statement by the Bank Indonesia:

Bank Indonesia believes that the monetary easing is consistent with maintained macroeconomic stability, specifically inflation in 2016 that’s expected to fall near the floor of the target corridor, a better-than-expected current account deficit, bigger trade balance surplus and relatively stable exchange rate. Against a backdrop of global economic moderation, the eased monetary policy is expected to underpin efforts to stimulate domestic demand, including credit, in order to maintain economic growth momentum. Bank Indonesia will continue to coordinate with the government to ensure that inflation control, growth stimulus strenghtening, and implementation of structural reform, are well underway to support sustainable economic growth.

Domestic economic growth in the third quarter was down slightly from the previous projection. Consumption was indicated to improve but remained limited. On the other hand, private investment, particularly non-construction investment, is estimated to remain weak in line with the large installed production capacity. Meanwhile, Bank Indonesia predicts the impact of fiscal stimuli to remain somewhat limited as the government adjusts spending in the second half of the year. Externally, global economic moderation and sluggish world trade have undermined improvements in the real sector exports, despite several commodity prices starting to rebound. Consequently, Bank Indonesia predicts 2016 economic growth to be around the floor of the 4.9-5.3% (yoy) range.

Indonesia’s balance of payments is expected to record an increase of surplus, with a lower current account deficit. Current account deficit in the third quarter is estimated to fall below 2% of GDP, especially bolstered by trade surplus, in line with the rebound in primary commodity export price, as well as a decline of non-oil and gas imports. 

The rupiah remained stable with a tendency of appreciating. The rupiah appreciated by an average of 0.41% to a level of Rp13,110 per USD. The appreciation continues and on the third week of October, the Rupiah closed at a level of Rp13,005 per USD. At home, positive sentiment concerning the domestic economy, stemming from maintained macroeconomic stability together with sound implementation of the Tax Amnesty, bolstered rupiah appreciation. Externally, the rupiah appreciated as global risk surrounding the timing of the proposed FFR hike eased. Moving forward, Bank Indonesia will continue to maintain exchange rate stability in line with the rupiah’s fundamental value.

Bank Indonesia expects inflation to remain under control at a low level and, by the end of 2016, to fall towards the floor of the 4±1% target corridor. The Consumer Price Index (CPI) recorded inflation of 0.22% (mom) in September 2016, which is considered under control and consistent with historical trends. Consequently, CPI inflation stood at 1.97% (ytd) and 3.07% (yoy). 

Financial system stability was maintained along with banking system resilience. In August 2016, the Capital Adequacy Ratio (CAR) was recorded at 23.0% and the liquidity ratio (liquid assets/deposits) at a level of 21.1%. Meanwhile, non-performing loans (NPL) stood at 3.2% (gross) or 1.5% (net). The looser monetary policy stance is continuously transmitted through the interest rate channel as reflected by lower lending and deposit rates. In contrast, monetary policy transmission through the credit channel remained suboptimal, in line with limited demand, including low investment demand from corporations. Credit growth was recorded at 6.8% (yoy) in August 2016, decelerating from 7.7% (yoy) the month earlier.

Bank Indonesia Unexpectedly Cuts Key Rate to 4.75%