Official Press Release Bank Indonesia: BI Rate Maintained at 7.50%
The central bank of Indonesia (Bank Indonesia) decided at today’s Bank Indonesia Board of Governors’ Meeting, convened on 8 May 2014, to maintain the country's benchmark interest rate (BI rate) at 7.50 percent, with the Lending Facility rate and Deposit Facility rate held at 7.50 percent and 5.75 percent respectively. This policy is consistent with efforts to steer the rate of inflation 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.
Bank Indonesia considers the policy response of Bank Indonesia along with the government successful in terms of rebalancing the domestic economy in the first quarter of 2014 and the past month of April. Such conditions are reflected in the continuing downward inflation rate trend and narrowing current account deficit. Domestic demand was well managed despite slower economic growth in the first quarter, below projections, as a result of a contraction in real exports, especially mined commodities. Moving forward, Bank Indonesia will continue to monitor the array of risks in the domestic and global economies, as well as implement anticipatory measures to ensure financial system stability is preserved and the current account deficit is reduced. To that end, Bank Indonesia will continuously strengthen its monetary and macroprudential policy mix as well as reinforcing coordination with the Indonesian government to control inflation and the current account deficit, as well as policy to bolster the structure of the national economy and manage external debt, especially corporate external debt.
Bank Indonesia assessments indicates that the global economic recovery persists. Improvements in global economic conditions are primarily supported by the economies of advanced countries such as the USA and countries in Europe as a result of the continued monetary stimuli. More favourable global economic conditions precipitated an increase in world trade volume. Notwithstanding, the economy of China slowed as the policy of economic rebalancing is implemented. Commodity prices also tended to slump, particularly rubber, copper and coal. Looking ahead, Bank Indonesia will continue to monitor risks in the global economy, especially risks originating from the normalisation policy of the Federal Reserve and the risk of a further economic downturn in China.
Economic growth in Indonesia during the first quarter of 2014 slowed because of a contraction in real exports. Economic growth recorded 5.21 percent (yoy) in the first quarter, down from 5.72 percent (yoy) in the previous quarter and lower than preliminary Bank Indonesia projections. The contraction in real exports stemmed primarily from mining exports like coal and mineral concentrates, amongst others because of weaker demand from China and sliding prices as well as the temporary effect of policy to restrict exports of raw minerals (2009 Mining Law). Furthermore, less government consumption contributed to the economic slowdown. Nonetheless, household consumption and investment remained solid, thereby propping up economic growth in the reporting quarter. Growth in household consumption was driven by dogged consumer confidence and the impact of the April legislative election. Investment grew moderately on the back of a rebound in non-construction investment, particularly investment in machinery, while construction investment tailed off. In line with moderating domestic demand, real imports were also sluggish and unable to offset the contraction in real exports, hence failing to catalyse net export performance.
Regionally, economic growth during the first quarter of 2014 was not even throughout the country. The results of analyses conducted by Bank Indonesia show that weaker domestic economic performance is primarily attributable to slower growth in areas based on mining, like Eastern Indonesia. Economic growth in Eastern Indonesia was 4.6 percent (yoy) in the first quarter, down sharply from 6.6 percent (yoy) in the previous quarter in line with less production in the mining sector as an outcome of policy to restrict exports of raw minerals. In contrast to Eastern Indonesia, the islands of Java and Sumatera posted growth of 5.8 percent (yoy) and 5.4 percent (yoy) respectively in quarter I 2014. In fact, growth in the special capital region of Jakarta surged from 5.6 percent (yoy) in the final quarter of last year to 6.0 percent (yoy) in the first quarter of this year. The trade sector and transportation contributed to robust growth in Jakarta.
The Indonesia Balance of Payments (BoP) improved in the reporting quarter. The balance of payments is expected to return to running a surplus due to a smaller current account deficit and a surge in foreign capital inflows. The current account deficit is expected at around 2.06 percent of GDP in quarter I 2014, which is smaller than the 2.12 percent noted in the previous quarter. The reduction in the current account deficit is credited to a contraction in non-oil & gas imports congruent with moderating economic growth, although exports also experienced a contraction. Sounder current account conditions were also ascribed to a smaller deficit in the services account, particularly transportation services, in harmony with less intense import activities. Meanwhile, an influx of foreign capital was recorded in the form of direct investment and portfolio investment triggered by positive sentiment concerning economic fundamentals in Indonesia. Foreign capital continued to flow into the country during April 2014. A healthier balance of payments during the past month of April helped foreign exchange reserves swell to USD $105.6 billion, equivalent to 6.1 months of imports or 5.9 months of imports and servicing external debt, which is well above the international standard of three months. Looking forward, Bank Indonesia will continue to monitor a range of global and domestic risks that could influence the current account deficit and external sector resilience, including private external debt. In the second and third quarters of 2014, the current account deficit is expected to expand in line with seasonal trends, amongst others, an increase in imports in the run up to the holy fasting month of Ramadan as well as income repatriation and interest payments. However, for 2014 as a whole the current account deficit is forecast to remain below 3 percent of GDP.
Improving economic fundamentals, accompanied by better BoP performance, helped the rupiah exchange rate strengthen during the first quarter of 2014, prior to a slight correction in April 2014. At the end of quarter I 2014, the rupiah strengthened 7.13 percent compared to the level at the end of 2013. Most appreciation has occurred since February 2014 as foreign capital has flowed into the country. Nevertheless, the rupiah experienced a moderate correction in April 2014 as a result of the Federal Reserve’s hawkish stance, concerns over the economic downturn in China and an escalation of geopolitical tensions along the disputed Ukraine-Russia border. In April 2014, the rupiah closed at a level of IDR 11,562 per US dollar, which is 1.74 percent weaker than the level posted at the end of March 2014. On average, the rupiah was valued in April 2014 at a level of IDR 11,439 per US dollar, down 0.17 percent on the previous month. Rupiah performance up to April 2014 was also accompanied by favourable developments in terms of the structure of the micro forex market, for example forex transaction volume increased and the bid-ask difference narrowed, confirming increasingly liquid conditions on the domestic forex market. Moving forward, Bank Indonesia will consistently maintain rupiah exchange rate stability in accordance with its fundamental value and supported by various efforts to deepen financial markets.
The rate of inflation continued to follow a downward trend, thus supporting the successful achievement of the inflation target in 2014, more specifically 4.5±1 percent, and reinforcing controlled economic rebalancing. The rate of inflation in quarter I 2014 was 7.32 percent (yoy), down on the 8.38 percent (yoy) recorded in the previous quarter. The deceleration in the inflation rate was due to an easing of inflationary pressures on volatile foods and core inflation. Inflationary pressures continued to dissipate in April 2014, with deflation equivalent to 0.02 percent (mtm) or 7.25 percent (yoy), which is a less than that documented in March 2014 at 0.08 percent (mtm) or 7.32 percent (yoy). The persistent downward trend in inflationary pressures during the past month of April 2014 was also bolstered by a sharp correction in food prices, especially rice and miscellaneous horticultural commodities in line with abundant domestic supply linked to the harvest season. In addition, core inflation remained under control as domestic demand moderated, external price pressures were minimal and inflation expectations were anchored. In future, Bank Indonesia will continue to monitor several inflation risks, including potential distress stemming from corrections of administered prices and potential food price hikes associated with a forecasted El Nino episode expected to bring the dry season and drought to a number of regions.
Financial system stability was also maintained with the support of banking system resilience and sound financial market performance. Banking industry resilience remained robust with credit risk, liquidity risk and market risk well mitigated as well as sufficient capital. Credit growth to the private sector slowed from 21.4 percent (yoy) in quarter IV 2013 to 19.1 percent (yoy) in the first quarter of in line with moderating domestic demand. Bank Indonesia will continue close coordination with the Financial Services Authority (OJK) to steer future credit growth that underpins sounder and more sustainable economic growth. Meanwhile, the capital market performed well in quarter I 2014 and April 2014, as evidenced by gains in the IDX Composite index and a lower yield on tradeable government securities (SBN). Greater investor optimism concerning the domestic economy helped buoy capital market performance.
Jakarta, 8 May 2014
Communication Department
Bank Indonesia
Tirta Segara
Executive Director