Analysis: Bank Indonesia Holds Key Rate at 4.25% in November
In line with expectations, the central bank of Indonesia (Bank Indonesia) left its benchmark interest rate unchanged on Thursday (16/11). The seven-day reverse repurchase rate (BI 7-day Reverse Repo Rate) was kept at 4.25 percent for a second straight month. Meanwhile, the deposit facility and lending facility rates were kept at 3.50 percent and 5.00 percent respectively.
In a statement Bank Indonesia said that the rate decision is consistent with its efforts to maintain macroeconomic and financial system stability as well as build momentum for economic recovery, while taking into consideration global and domestic economic dynamics.
With the BI 7-day Reverse Repo Rate at 4.25 percent, Bank Indonesia is confident that domestic inflation can be kept well within its target range, while maintaining a manageable current account deficit.
Although domestic economic growth has accelerated in Q3-2017 (with a more equitable and balanced structure), Bank Indonesia keeps a close eye on several risks, including global risks linked to plans to tighten monetary policy in several advanced countries, as well as domestic risks, such as bleak household consumption growth.
Global economic growth continued to expand, possibly touching a pace of 3.6 percent (y/y) in 2017 and 2018 on the back of improving GDP growth in China, Japan and Europe (beating previous expectations), coupled with solid economic gains in the United States. China's economy is driven by strong exports and domestic demand (implying recovering consumer confidence). Meanwhile, Japan's economic outlook has been upgraded in line with the ongoing export recovery.
In Europe, the economic growth outlook has also been revised upwards as well on recovering export performance (triggered by improving world trade and the domestic economic recovery). Lastly, in the USA tenacious consumption and increasing investment contributed to gains in economic growth.
Due to strengthening global economic growth, demand and trade, commodity prices are expected to surpass the previous projections.
The Indonesian economy accelerated to a growth pace of 5.06 percent (y/y) in the third quarter of 2017, up from 5.01 percent (y/y) in the preceding quarter. Furthermore, stronger economic growth in the third quarter of 2017 was accompanied by a more balanced structure after exports along with government and private investment performance improved. Exports were buoyed by rising commodity prices, such as crude palm oil (CPO) and coal.
Meanwhile, investment posted its highest level since the second quarter of 2013, supported by building and non-building investment. Government consumption also increased in line with greater spending. Household consumption, however, remained bleak.
By sector, the main driver of economic growth in Indonesia in Q3-2017 was (1) the manufacturing sector and (2) the trade, hotels and restaurants (THR) sector. They were the dominant contributors to GDP growth and absorbed plenty of labour. After seeing weaker-than-estimated economic growth in the first three quarters of 2017, Bank Indonesia now revised its forecast for Indonesia's full-year 2017 GDP growth to 5.1 percent (y/y), from its earlier range of 5.0 - 5.4 percent (y/y). In 2018, the central bank expects GDP growth to accelerate slightly to the range of 5.1 - 5.5 percent.
Indonesia's balance of payments (BOP) increased significantly in Q3-2017 after the nation's current account deficit narrowed and the capital and financial account surplus expanded. The current account deficit stood at 1.65 percent of GDP in Q3, improving from 1.91 percent in the previous quarter. Stronger export performance, in terms of value and volume, supported a reduction in Indonesia's current account deficit despite a corresponding surge of imports to meet rising domestic demand.
On the other hand, the capital and financial account enjoyed sharp gains in Q3-2017 due to an influx of non-resident capital in the form of direct investment in line with investor optimism concerning the promising domestic economic outlook. Cumulatively, as of October 2017, the trade surplus of Indonesia reached USD $11.78 billion, up from USD $7.65 billion in the same period one year ago. Moreover, the position of official reserve assets at the end of October 2017 stood at USD $126.5 billion, adequate to cover 8.6 months of imports or 8.3 months of imports and servicing government external debt, which is well above international adequacy standards of around three months. Throughout 2017, the balance of payments is expected to remain positive on the back of the capital and financial account surplus, with the current account deficit expected to be maintained below 2 percent of GDP.
The Indonesian rupiah exchange rate, on average, depreciated in October 2017, primarily due to external factors. The rupiah weakened by an average of 1.63 percent to IDR 13,528 per US dollar in October. The depreciation was in line with prevailing trends for most other global currencies against the US dollar. The US dollar appreciated globally due to the financial markets' response to the nomination of The Federal Reserve Governor as well as its monetary policy stance normalization, growing expectations of another Fed Funds Rate hike and US plans for tax reform. Nevertheless, Bank Indonesia continues to stabilize the rupiah in line with its fundamental value, while maintaining market mechanisms.
Indonesian Rupiah versus US Dollar (JISDOR):
| Source: Bank IndonesiaMeanwhile, low headline inflation was maintained in Indonesia. Consumer Price Index (CPI) inflation in October 2017 stood at 0.01 percent (m/m) or 3.58 percent (y/y), below the October average for the past three years at 0.18 percent (m/m). Consequently, year-to-date inflation now reached 2.67 percent. Lower core inflation helped to control headline inflation in line with anchored expectations, low import prices and limited domestic demand. Furthermore, volatile foods (VF) also recorded low inflation, supported by supply-side improvements and the favorable impact of various government policies. Meanwhile, inflation of administered prices (AP) was kept under control. End of year inflation in 2017 is expected to remain low at 3.0 - 3.5 percent (y/y), within the lower end of the 4.0±1 percent target range.
Financial system stability remained stable, amid limited banking intermediation. The maintained financial system stability was reflected in the Capital Adequacy Ratio (CAR) in the banking industry which remained high at 23.0 percent, with a liquidity ratio of 22.6 percent in September 2017. At the same time, non-performing loans (NPL) were recorded at 2.9 percent (gross) or 1.3 percent (net).
The banking industry of Indonesia acknowledged slower credit growth, decelerating from 8.3 percent (y/y) to 7.9 percent (y/y). In contrast, deposit growth accelerated from 9.6 percent (y/y) to 11.7 percent (y/y) in the same period. For 2017, deposit growth is estimated at 10 percent while credit growth, at around 8 percent, is lower than expected. Considering the limited credit growth, Bank Indonesia decides to maintain the Countercyclical Capital Buffer (CCB) at 0 percent, to encourage the improvement of banking intermediation function.