Monetary Policy Indonesia: Central Bank Cut Key Interest Rate Again
The central bank of Indonesia (Bank Indonesia) made another surprise move by cutting its benchmark BI 7-day Reverse Repo Rate 25 basis points (bps) from 4.50 percent to 4.25 percent at the September 2017 policy meeting. Meanwhile, Bank Indonesia also lowered the deposit and lending facility rates by 25 bps to 3.50 percent and 5.00 percent, respectively, effective per 25th September.
Most analysts were surprised by the move. One month ago Bank Indonesia had already cut its key rate by 25 bps to 4.50 percent (which was the first cut implemented since October 2016). Since the start of 2016 Bank Indonesia has now lowered the benchmark rate by 200 bps.
Bank Indonesia saw more room for monetary easing in September as the nation's inflation rate is comfortably low at 3.82 percent year-on-year (y/y), a low rate for Indonesian standards, while forecasts indicate that there is no reason to expect sudden and unexpected accelerating inflation before the year-end. Meanwhile, the current account deficit of Indonesia has also remained under control.
Regarding external risks, specifically a possible Fed Funds Rate (FFR) hike and looming US balance sheet normalization in October 2017, Bank Indonesia expects to see limited impact on the Indonesian economy.
Meanwhile, the lower interest rate environment can boost (still sluggish) credit growth, hence boost the Indonesian economy. Indonesia's economic growth currently seems "trapped" at around 5.0 percent (y/y) and therefore monetary easing could provide some support although it will usually take at least two or three months before a rate cut indeed translates to lower rates in the banking sector and higher demand for credit.
Regarding global economic growth, Bank Indonesia expects US economic growth to be higher than previously projected because domestic demand shows an improvement. Likewise, growth in the European Union (EU) accelerated on the back of increasing consumption and less financial sector uncertainty. Meanwhile, in developing countries, solid consumption and increased lending in China translated into stronger economic growth (hence compensating for lower growth in India).
In commodity markets, the crude oil price was relatively stable, while export prices from Indonesia remained relatively high, particularly coal and copper prices. An improving global economy will have a positive impact on Indonesia's export performance. Meanwhile, Bank Indonesia expects international commodity prices to remain high.
Therefore, Bank Indonesia expects Indonesia's economic growth to accelerate in Q3-2017. This improvement also comes on the back of a rise in domestic demand, especially household consumption, reflected by improving retail and durable goods sales. Robust building investment is expected to persist, in line with government spending. Meanwhile, non-building investment is expected to improve, especially in export commodity based industry, along with the high commodity prices. Although modest, Bank Indonesia starts to see improvement in the following two sectors: trade, hotels and restaurants, and manufacturing.
Bank Indonesia maintained its growth outlook for the Indonesian economy at the range of 5.0 - 5.4 percent (y/y) in 2017 and accelerating to 5.1 - 5.5 percent (y/y) in 2018.
In August Indonesia's trade surplus returned, supported by an increase in the non-oil & gas trade surplus that exceeded the growing oil & gas trade deficit. Cumulatively, Indonesia's trade surplus reached USD $9.11 billion (January-August 2017 period), nearly doubling from one year ago.
Meanwhile, foreign capital inflows into the financial markets of Indonesia reached USD $9.17 billion as of August 2017. Consequently, the position of foreign exchange reserves at end-August stood at USD $128.8 billion, equivalent to 8.9 months of imports or 8.6 months of imports and servicing government external debt, well above international standards.
The Indonesia rupiah remained stable in August 2017, actually appreciating by a modest average of 0.02 percent to IDR 13,343 per US dollar after the value of the US dollar slumped and an influx of foreign capital flow into the domestic FX market. US dollar weakness stemmed from the dovish statements relayed by the Federal Reserve and European Central Bank (ECB), along with concerns over US economic growth. Meanwhile, foreign capital flows were drawn to positive yields in Indonesia. Furthermore, rupiah exchange rate volatility was mitigated and, therefore, lower than reported in peer countries.
Indonesian Rupiah vs US Dollar (JISDOR):
| Source: Bank IndonesiaBahas
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