Analysis: Bank Indonesia Kept BI 7-Day Reverse Repo Rate at 4.75%

In a statement Bank Indonesia said the decision is consistent with its efforts to maintain macroeconomic and financial system stability, while considering the dynamics of the global and domestic economy.

Bank Indonesia sees the process of domestic economic recovery continuing albeit not as strong as previously projected, especially due to a slowdown in consumption despite an increase in investment. Pressures on inflation are expected to decrease below previous expectations due to weak demand and controllable food prices. Bank Indonesia continues to monitor risks, particularly the US Federal Reserve's balance sheet normalization plan as well as the planned Fed Funds Rate hike, and - domestically - the ongoing consolidation in the corporate and banking sectors.

In the view of Bank Indonesia the global economy is improving as projected, despite several risks that demand vigilance. On one hand, US economic growth is expected to be lower after the limited impact of fiscal policy and investment was squeezed by a potentially lower oil price. On the other hand, China's economy is expected to accelerate on the back of stronger consumption and rising exports. Meanwhile, the economy of the European Union is also predicted to gain momentum as consumption increases, while export performance and optimism in the economy have improved.

The aforementioned global economic advances have stimulated an increase in world trade volume and is expected to cause a positive impact on Indonesia's export performance. Meanwhile, high international commodity prices are expected to persist despite potential downside pressures on the oil price linked to oversupply outstripping limited demand.

Indonesia's economic recovery process continued in the second quarter of 2017, albeit not as strong as previously projected. Consumption growth is weak, as reflected by slower retail sales. Exports continued to grow, albeit below the previous projection due to slower growth of export volume for primary and manufacturing goods. In contrast, investment performance improves, especially in the non-building sector related to natural resources, while building investment remains solid supported by government infrastructure projects but also by the private property sector. Going forward, economic growth is expected to increase, supported by stronger export performance and investment.

With improvements in the second half of the year, Bank Indonesia predicts the 2017 national economic growth to stay within the 5.0-5.4 percent range. Several risks on the economic growth prospect still demand vigilance, especially related to slow domestic demand along with the ongoing consolidation in the corporate and banking sectors.

Indonesia's trade balance recorded a surplus in the second quarter of 2017. The trade surplus stood at USD $3.5 billion, mainly supported by the large surplus in non-oil and gas trade. Non-oil and gas export growth was recorded at 6.8 percent (y/y), specifically due to a hike in primary commodity prices, while non-oil and gas import growth was recorded at 4.9 percent (y/y), especially involving consumption goods import. Supported by the strong investor confidence, foreign capital inflows into the Indonesian market in the second quarter of 2017 were recorded at USD $4.3 billion, making the non-resident inflow through the end of June 2017 accumulate to USD $9.6 billion.

Meanwhile, the position of Indonesia's official reserve assets at the end of the second quarter of 2017 was recorded at USD $123.1 billion, equivalent to 8.9 months of imports or 8.5 months of imports and servicing government external debt, which is well above the international standard of around three months.

The Indonesian rupiah remained relatively stable and tracked an appreciatory trend. The rupiah strengthened by a monthly average of 0.17 percent to a level of IDR 13,298 per US dollar in the reporting period. The appreciation was bolstered by the ongoing foreign exchange (FX) sales by corporations and a considerably large influx of foreign capital into the domestic market, and also in line with the appreciation of regional currencies. Exchange rate volatility mas maintained at a low level, along with increased efficiency in the FX market. This is in line with several FX market deepening efforts as reflected by the increasing daily FX transaction volume, including derivative transactions. Bank Indonesia will continue to stabilize rupiah exchange rates in line with the currency's fundamental value, while maintaining market mechanisms.

Indonesian Rupiah versus US Dollar (JISDOR):

| Source: Bank Indonesia

Low headline inflation was observed in June 2017, thus supporting attainment of the 2017 inflation target, namely 4±1 percent. The Consumer Price Index (CPI) was recorded at 0.69 percent month-on-month (m/m) in June 2017, below the average rate during the Eid-ul-Fitr (Idul Fitri) period for the past three years at 0.85 percent (m/m). Inflation was controlled by volatile foods and core inflation, which were lower than the historical average. Volatile foods inflation stood at 0.65 percent (m/m), below the historical average for the Idul Fitri period for past three years at 1.78 percent (m/m). This was the result of various government policies to stabilize food prices, combined with tight coordination with Bank Indonesia. Furthermore, core inflation in June 2017 was recorded at 0.26 percent (m/m), which was also below the historical average for the Idul Fitri period for past three years at 0.40 percent (m/m). Low core inflation stemmed from weak domestic demand, stable exchange rates and anchored inflation expectations. In contrast, administered prices (AP) recorded relatively high inflation of 2.10 percent (m/m) after the third phase of electricity tariff hikes was implemented.

Maintained banking industry resilience and stable financial markets continued to underpin solid financial system stability. In May 2017, the Capital Adequacy Ratio (CAR) of Indonesia's banking industry stood at 22.7 percent and the liquidity ratio at 22.3 percent. Meanwhile, non-performing loans (NPL) were recorded at 3.1 percent (gross) or 1.4 percent (net). Deposit growth accelerated from 9.9 percent (y/y) to 11.2 percent (y/y) over the same period. Credit growth slowed in May 2017, from 9.5 percent (y/y) the month earlier to 8.7 percent (y/y). Going ahead, deposit and credit growth are expected to increase, to reach the range of 9-11 percent and 10-12 percent, respectively. This potential growth, however, is still shadowed by a number of risks, namely domestic demand recovery prospects and developments in the banking consolidation.

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