JAKARTA: Indonesia's central bank cut its current and future benchmark interest rates by 25 basis points on Thursday, in a surprise move aimed at reviving Southeast Asia's largest economy.
Below is the Reuters translation of the central bank's statement:
The BI Board of Governors decided on June 15-16th to lower the BI rate by 25 basis points to 6.50 percent, with the Deposit Facility lowered by 25 basis points to 4.50 percent and Lending Facility lowered by 25 basis points to 7.00 percent, taking effect starting June 17, 2016. Bank Indonesia also decided to lower BI 7-day (Reverse) Repo Rate by 25 basis points from 5.50 percent to 5.25 percent, in line with the reformulation plan for policy interest rate which has been announced on April 15, 2016.
In macroprudential, Bank Indonesia eases macroprudential policy with due regard to the precautionary principle, through: (i) Relaxation to requirements on Loan-to-Value Ratio (LTV) and Financing-to-Value Ratio (FTV) for loan/financing on property for landed houses, apartments, and shophouses, and (ii) easing the credit/financing through off-plan mechanism by staging credit disbursement according to development progress on the landed house, apartments, and shophouses up to the second credit/financing.
To push bank loans, Bank Indonesia has also raised the bottom limit of the Loan to Financing Ratio related to minimum statutory reserves (GWM-LFR) from 78 percent to 80 percent, with the top limit kept at 92 percent. These terms in the macropudential area will be implemented in August 2016.
The policy mix is in line with the assessment of Bank Indonesia board of governors, as reflected by low inflation, an under control current account deficit, and a relatively stable exchange rate. The policy mix is expected to further strengthen efforts to boost domestic demand to continue to drive the momentum of economic growth while maintaining macroeconomic stability, amid the weak global economy.
Bank Indonesia believes the easing of monetary and macroprudential policy will strengthen the policy instituted by the government to boost sustainable economic growth through growth stimulus and accelerating the implementation of structural reforms.
The global economic recovery has been slow and uneven, while the risk of uncertainty in global financial markets eased. Although the indicators of consumption and inflation showed the US economy in improving trend, the US economic recovery is still not very strong.
This is reflected in nonresidential investment, which is still slowing, labour market conditions are not too strong, and expectations of future inflation are lower. These conditions are expected to encourage the Fed to remain cautious in adjusting interest rates on Fed Funds Rate (FFR).
On the other hand, Europe's economic recovery is moderate and shadowed by risks from Brexit, potentially adding to pressure on global financial markets. The Japanese economy is still weak, visible from falling exports, stagnant consumption, while deflation increases.
These conditions encourage the continuation of accommodative monetary policy in developed countries. The improvement of China's economy is restrained, as reflected in the slowing of investment, production and consumption.
In the commodity markets, oil prices rose, although in the future prices are expected to remain at a relatively low level, considering the high supplies amid weak demand. Prices of some Indonesian exports commodities improved, especially CPO.
Domestic economic growth in the second quarter of 2016 is expected to improve, though not as strong as previously expected. Household consumption is expected to increase, in line with the increase in retail sales ahead of Eid al-Fitr, which, among other things, is supported by the payment of holiday allowance.
In the midst of increasing government capital expenditure, growth in investment, particularly non-construction, is not showing significant improvements. On the external side, exports are expected to maintain limited growth, although exports of some commodities began to increase.
Bank Indonesia sees that various steps are still needed to boost domestic demand to continue to strengthen the momentum of economic growth. With these developments, the overall economic growth for 2016 is estimated to be in the range of 5.0 percent to 5.4 percent (year-on-year).
Indonesia's trade balance recorded a surplus in May 2016, mainly supported by non-oil trade surplus.
Indonesia's trade balance recorded a surplus of $0.38 billion, lower than the previous month's surplus of $0.66 billion.
Lower surplus was mainly influenced by the increase in oil imports, following seasonal patterns before the month of Ramadan and Eid. The trade surplus remains in line with the forecasts of the current account deficit in the second quarter of 2016.
On the other hand, capital inflows into Indonesia's financial market until May 2016 has reached $4.5 billion.
Capital inflows continued rising in early June 2016, after being subjected to pressure of capital outflow in the previous month.
With these developments, foreign reserves at the end of May 2016 stood at $103.6 billion, equivalent to 7.9 months of imports or 7.6 months of imports and government foreign debt payments.
The figure is above the international adequacy standard of approximately 3 months of imports.
The rupiah currency strengthened in June 2016, after having weakened in the previous month due to increased global financial market risks related adjustment plan on FFR.
On average, the rupiah depreciated 1.95 percent (m/m) to 13.434 per US dollar in May 2016. The depreciation pressures, which were also experienced by other currencies, were driven by rising global risk triggered by a US central bank statement related to the planned increase in FFR.
However, in early June 2016, the rupiah bounced back, along with rebounding capital inflows after the announcement of US employment data which were lower than expected.
The Fed's decision to delay the hike in FFR on June 15, 2016 FOMC meeting is expected to have a positive impact on the stability of the rupiah. Looking ahead, Bank Indonesia will maintain the stability of the exchange rate, in accordance with its fundamental value.
Inflation in May was under control and is expected to be in the range of the inflation target in 2016, which is 4?1 percent.
Inflation in May 2016 was recorded at 0.24 percent (m/m) or 3.33 percent (y/y), relatively lower than average inflation before the month of Ramadan in the last five years.
Inflation is driven mainly by volatile food components and government administered prices.
Inflation from volatile foods was mainly due to increase in prices of some food commodities, on higher demand ahead of Ramadan.
Inflation in administered prices was mainly driven by the increase in air freight rate. On the other hand, core inflation is under control and recorded at 0.23 percent (m/m) or 3.41 percent (y/y), in line with subdued inflation expectations and the limited domestic demand.
To face the month of Ramadan and Eid, various policies adopted by the government and a strong coordination between Bank Indonesia and the government is expected to control inflation, so inflation during Ramadan and Eid al-Fitr this year may be lower than inflation in the same period in previous years.
Based on these developments, inflation at the end of 2016 is expected to be around the midpoint of the inflation target range in 2016.
The financial system remained stable and the resilience of the banking system was maintained.
In April 2016, the capital adequacy ratio (CAR) stood at 21.7 percent, while the Non Performing Loan (NPL) was at of 2.9 percent (gross) or 1.5 percent (net).
Monetary policy easing transmission through interest rates persists, reflected by the continued decline in bank interest rates, both deposit rates and lending rates.
Transmission through the credit channel is still not optimal.
This is seen in slowing loan growth of 8.7 percent (y/y) in March 2016 to 8.0 percent in April 2016. Similarly, the growth of third party funds (DPK) in April 2016 was 6.2 percent (y/y), compared to the previous month growth of 6.4 percent (y/y).
Bank Indonesia sees policy easing is needed to boost credit growth, both in terms of supply and demand, in order to encourage future economic growth.
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