Bank Indonesia Raises Interest Rate to fight Inflation and Support the Rupiah
Today, Bank Indonesia surprised many analysts and investors by raising its benchmark interest rate by 50 bps to 6.50 percent. Indonesia's central bank assessed that this measure is the correct one with regard to supporting the IDR rupiah (which is one of the worst Asian currencies against the US dollar this year) and to fight higher inflation after the government decided to cut fuel subsidies in June. It expects inflation to peak in July at about 2.3 percent (month to month) but to moderate soon afterwards.
Below is the official Bank Indonesia press release as can be found on their website:
In the Board of Governors' Meeting convened on July 11th, 2013, Bank Indonesia decided to raise the BI rate by 50 basis points (bps) to 6.50% and the deposit facility rate by 50 basis points to 4.75%, while to hold the lending facility rate at 6.75%. The policy was adopted to ensure that inflation will return to its target path after the fuel price hike. In addition, Bank Indonesia will also strengthen its policy mix. Firstly, the Bank continues to maintain stability of Rupiah exchange rates in line with its fundamentals level by providing adequate liquidity in the foreign exchange market. Secondly, the bank will enhance loan to value regulation on property sector, in particular on certain types of residential property mortgage loans. Thirdly, the bank will strengthen policy coordination with the Government, focusing on the efforts to minimize inflationary pressure and to maintain macroeconomic stability as well as financial system stability. Bank Indonesia believes that the policy mix will be sufficient to minimize inflationary pressure and to maintain Rupiah exchange rate stability as well as financial system stability so that sound economic growth momentum may be sustained and move toward a more sound economy.
The global economy tends to slow down and still overshadowed by uncertainty. The US economy is predicted not to grow as strong as expected, despite the increment of production and consumption. The European economy has not been showing a significant improvement yet. Meanwhile, economic growth of India and China is lower than expected although still at a high level. Based on these developments, global economic growth in 2013 is expected to reach 3.2%, lower than earlier projections. At the same time, global commodity prices still tend to decline, except for the oil price. Speculation on the issue of tapering off by the Fed has influenced global financial markets and triggered capital reversal from emerging markets. In June 2013, foreign investors sold Government bonds as well as stocks worth of 4.1 billion USD.
Indonesia's economic growth in 2013 is forecast in the range of 5.8%-6.2%, lower than the earlier forecast of 6.2%-6.6%. Apart from slowing economic growth in Q2 and Q3-2013, both at 5.9%, this downward revision is due to export restraints which are in line with weakening global economic growth and commodity prices. Household consumption and investment are forecast to reduce slightly as a result of deteriorating purchasing power triggered by unfavorable export and the impact of the fuel price hike. Economic growth is predicted to rebound in Q4-2013 and is expected to accelerate in the range of 6.4%-6.8% in 2014.
On the external side, Indonesia's balance of payments (BOP) in Q2-2013 is expected to experience a lower deficit than in the earlier quarter. This improvement of Indonesia’s Balance of Payments is supported by a considerable surplus in the capital and financial account, despite a deficit in Q1-2013. Large surplus in the capital and financial account is supported by capital inflow, both in the forms of foreign direct and portfolio investments, in line with the positive perception on Indonesia's economic fundamentals and prospects. In the meantime, in accordance to its seasonal pattern, current account deficits in the Q2-2013 is expected to be higher than that in previous quarter. Export performance is still subdued with weak external demand and declining global commodity prices, while imports including non-oil import continue to increase. International reserves at the end of June 2013 reached USD $98.1 billion, equivalent to 5.4 months of imports and government’s external debt services, above the adequacy level of international standard.
Depreciation pressure on Rupiah continued in Q2-2013 in accordance with its fundamental. On point to point, the rupiah depreciated by 2.09% (qtq) to IDR 9.925 per USD, or on average depreciated by 1.03% (qtq) to IDR 9.781 per USD. In line with exchange rate depreciation in the region, the rupiah’s weakening was driven mainly by portfolio adjustment by non-residents due to sentiments associated with tapering off monetary stimulus by the Fed. Bank Indonesia observed that the ongoing development on the Rupiah Exchange rate reflects the economic fundamental.
CPI inflation ran fairly high in June 2013 and reached 1.03% (mtm) or 5.90% (yoy). As previously predicted by Bank Indonesia, the inflationary pressure stemmed from the recent hike in subsidized fuel prices, and subsequently induced higher prices in administered prices and volatile food. Meanwhile, core inflation is still contained at 3.98% (yoy). Bank Indonesia predicts that the impact of higher fuel prices will be temporary for approximately three months, peaking in July 2013, then easing in August and back to normal in September 2013. Bank Indonesia will remain vigilant and responds with measured policy to mitigate second round effects of the fuel price hike to inflation, including strengthening policy coordination with the Government. The range of aforementioned measures is expected to gradually curb the inflationary pressures and bring inflation down to its target range of 4.5%±1% in 2014.
Financial system stability is well maintained, despite pressures triggered by global sentiments. Financial system stability is supported by a solid and sound banking industry, as reflected by the high capital adequacy ratio (CAR) at 18.4%, which is well above the minimum capital requirement of 8% and the low ratio of gross non-performing loans (NPL) at 1.95% in May 2013. In line with a decelerating domestic economy, credit growth slowed down in May 2013 to 21.0% (yoy). The growth of working capital and investment credits, although still in a downward trend, remained high at 21.7% (yoy) and 22.9% (yoy) respectively, while consumer credit slowed down to 18.4% (yoy). Bank Indonesia observed that the development on certain types of residential property mortgage loans grew substantially high and may negatively affect the performance of the banking sector as well as financial system stability.
The complete report of the July Board of Governors’ Meeting, presenting macroeconomic developments and monetary policy will be published in the Monetary Policy Report (MPR). This publication is accessible through Bank Indonesia’s website. The quarterly regional economy development can be read in the summary of the Nusantara Report (the Regional Economic dan Financial Report).
Jakarta, 11 July 2013
Communication Department
Difi A. Johansyah
Executive Director