By CentralBankNews.info
Indonesia’s central bank returned to the easing path after a two-month pause and said there was still “space to lower interest rates in line with mild inflationary pressures, maintained external stability and the need to stimulate economic growth.”
Bank Indonesia (BI) cut its 7-day reverse repo rate by another 25 basis points to 4.25 percent, its third rate cut this year following cuts in February and March.
The rate cut was expected by analysts in light of the economic pain being inflicted on Indonesia from the global measures to curb the spread of the Covid-19 virus.
This year BI has cut its rate by a total of 75 points and since July 2019, when it began easing in response to slowing global growth, the rate has been cut 7 times by a total of 175 points.
Today, BI also lowered its deposit rate by 25 basis points to 3.50 percent and the lending facility rate to 5.0 percent.
“The decision is consistent with efforts to maintain economic stability and nurture economic recovery momentum in the COVID-19 era,” BI said, adding it would continue to stabilize the exchange rate of the rupiah and continue with its asset purchases, or quantitative easing.
In addition to the rate cuts, BI said it would begin remunerating banks that meet daily and average rupiah reserve requirements of 1.5 percent annually based on 3 percent of deposits as of Aug. 1.
Last month BI kept its rates steady to ensure stability of its rupiah but a rise in its exchange rate this month gave the central bank room to ease its policy further.
“The rupiah is gaining strength as foreign capital continues to flow into domestic financial markets,” BI said.
BI noted a 5.69 percent rise in the rupiah as of June 17 from the average level in May, saying this reflects an easing of uncertainty in global financial markets, maintained investor confidence in the country’s economic outlook and attractive financial investments.
Today the rupiah was trading 14,143.3 to the U.S. dollar, up 17 percent since a low of 16,564.8 on March 24 but still down 1.5 percent this year.
Indonesia’s economy has contracted for two quarters in a row and BI said it expects another decline in the second quarter as exports are shrinking and household and investments are falling due to the restrictions from measures to curb the virus.
Indonesia’s gross domestic product contracted by 2.41 percent in the first quarter from the fourth quarter, which shrank 1.74 percent from the third quarter. Year-on-year, the economy expanded 2.97 percent in the second quarter.
Developments in May point to incipient signs of less pressure on the domestic economy, BI said, adding it expects a recovery to begin in the third quarter.
Growth this year is expected to average 0.9 to 1.9 percent and then 5.0 to 6.0 percent in 2021.
Earlier this week Indonesia’s finance minister forecast an economic contraction of 3.1 percent in the second quarter.
Bank Indonesia released the following statement:
“The BI Board of Governors agreed on 17th and 18th June 2020 to lower the BI 7-day Reverse Repo Rate by 25 bps to 4,25%, Deposit Facility (DF) rates lowered 25 bps to 3,50% and Lending Facility (LF) rates lowered 25 bps to 5,00%. The decision is consistent with efforts to maintain economic stability and nurture economic recovery momentum in the COVID-19 era. Moving forward, Bank Indonesia still perceives space to lower interest rates in line with mild inflationary pressures, maintained external stability and the need to stimulate economic growth. Policy to stabilise rupiah exchange rates and quantitative easing will be continued. Furthermore, Bank Indonesia has decided to implement reserve requirement remuneration for banks meeting daily and average rupiah reserve requirements of 1.5% per year based on 3% of deposits, effective 1st August 2020.
Bank Indonesia will continue to strengthen its policy mix and synergise to implement the follow-up policies required through coordination with the Government and Financial System Stability Committee in order to maintain macroeconomic and financial system stability, while supporting the national economic recovery. To that end, Bank Indonesia is committed to funding the State Revenue and Expenditure Budget (APBN) through SBN purchases in the primary market and providing liquidity in the banking industry to bolster the loan (financing) restructuring program and support the national economic recovery.
The global economic contraction has persisted, although global financial market uncertainty has eased in line with a flattening of the COVID-19 curve. Restrictions on economic activity to contain COVID-19 risk lowering global economic growth in 2020 beyond initial projections. Nevertheless, world trade volume and international commodity prices have not contracted as deeply as previously expected. Most countries are maintaining fiscal and monetary stimuli to mitigate the risk of economic contraction. The latest developments show economic activity in several countries is beginning to pick up in line with the policy response and unwinding of lockdown measures after flattening the COVID-19 curve. Early indicators in May 2020 have shown nascent signs of improvement, including the Manufacturing Purchasing Managers Index (PMI), electricity consumption in China, positive property sector growth in China and the United States as well as services PMI gains in Europe, Japan and the United States, despite all remaining at low levels. Such developments have reduced uncertainty in global financial markets and attracted global capital flows to developing economies, while alleviating exchange rate pressures in developing economies, including Indonesia.
National economic growth is still expected to decline in the second quarter of 2020, although the latest developments indicate milder pressures. Exports are shrinking on global economic contraction, while household consumption and investment are decreasing due to large-scale social restrictions that have curbed economic activity. Developments in May 2020 point to incipient signs of less pressure on the domestic economy. The export contraction is not as deep as previously projected in line with increasing demand from China. Furthermore, early indicators of domestic demand reveal the economy has reached its lowest level and is now entering a recovery phase, as confirmed by cement sales, retail sales, PMI and improving consumer expectations. Bank Indonesia expects the economic recovery process to gain momentum in the third quarter of 2020 after the government relaxes large-scale social restrictions in the middle of June 2020, coupled with the policy stimuli already implemented. National economic growth in Indonesia is projected in the 0.9-1.9% range for 2020 before rebounding to 5.0-6.0% in 2021 on the back of global economic gains as well as policy stimuli introduced by the Government and Bank Indonesia. Moving forward, Bank Indonesia will continue to strengthen synergy with the Government and other relevant authorities to ensure policy effectiveness in terms of driving the economic recovery during and after COVID-19.
Indonesia’s external sector has remained resilient in the second quarter of 2020. A narrow current account deficit is projected, consistent with trade balance improvements in response to declining imports caused by lower domestic demand and demand for production inputs for export activity. The trade balance recorded a USD2.09 billion surplus in May 2020, reversing the USD372.1 million deficit in April 2020. In addition, foreign capital inflows have been maintained in line with less global financial market uncertainty and persistently attractive domestic financial assets for investment, coupled with a resilient national economic outlook. Foreign capital flows in the form of portfolio investment in the second quarter of 2020, as of 15th June 2020, recorded a net inflow totalling USD7.3 billion. In addition, the position of reserve assets increased to USD130.5 billion at the end of May 2020, equivalent to 8.3 months of imports or 8.0 months of imports and servicing government external debt, which is well above the international adequacy standard of around three months. Moving forward, Bank Indonesia is anticipating a narrower current account deficit, possibly around 1.5% of GDP in 2020, much lower than the 2.5-3.0% of GDP projected previously. Similarly, the current account deficit is projected below 2.5-3.0% of GDP in 2021.
The rupiah is gaining strength as foreign capital continues to flow into domestic financial markets. As of 17th June 2020, the rupiah appreciated 3.75% (ptp) or 5.69% on the average level recorded in May 2020. Notwithstanding, the rupiah has still lost around 1.42% of its value compared with the end of 2019. Recent rupiah appreciation is consistent with less global financial market uncertainty, coupled with highly attractive domestic financial assets for investment and maintained foreign investor confidence in the national economic outlook. Bank Indonesia still perceives the rupiah as fundamentally undervalued, leading to potential appreciation and supporting the economic recovery process. Potential rupiah appreciation is underpinned by several fundamentals, such as low and controlled inflation, a narrow current account deficit, competitive yields on domestic financial assets and a lower risk premium. Furthermore, supporting exchange rate policy effectiveness, Bank Indonesia continues to optimise monetary operations in order to safeguard market mechanisms and preserve adequate liquidity in the money market and foreign exchange market.
Inflation remains low, thereby supporting economic stability. Consumer Price Index (CPI) inflation decreased slightly from 0.08% (mtm) in April 2020 to 0.07% (mtm) in May 2020. Inflation in May 2020 was lower than the historical average during the Ramadan and Eid-ul-Fitr festive period, which has averaged 0.69% (mtm) for the past five years. Consequently, annual CPI inflation in May 2020 was recorded at 2.19% (yoy), down from 2.67% (yoy) in April 2020. By component, lower core inflation is in line with fading domestic demand and Bank Indonesia consistency to anchor inflation expectations to the target corridor. Volatile foods recorded deflation in the reporting period, primarily due to price corrections affecting several commodities on weaker demand, adequate supply and smooth distribution. Meanwhile, Administered Prices inflation was edged upwards by seasonal hikes to airfares, rail fares and filtered cigarette prices. Moving forward, Bank Indonesia will consistently maintain price stability and strengthen policy coordination with the central and local governments to control low inflation within the 3.0%±1% target corridor in 2020 and 2021.
Liquidity in the banking system remains adequate, thereby supporting lower interest rates. Adequate bank liquidity is reflected in the high average daily transaction volume recorded in the interbank money market, reaching Rp9.9 trillion in May 2020, as well as the persistently high ratio of liquid assets to deposits at 25.14% in April 2020. Such developments have had a positive impact on low interest rates. In May 2020, the average overnight interbank rate and 1-week JIBOR remained stable and convergent around the BI 7-Day (Reverse) Repo Rate at 4.33% and 4.60% respectively. Furthermore, the weighted average interest rates on time deposits and working capital loans decreased to 5.84% and 9.60%, demonstrating effective monetary policy transmission and Bank Indonesia strategy to maintain adequate liquidity in the economy. Amidst lower interest rates, M1 and M2 growth in April 2020 remained sluggish at 8.4% (yoy) and 8.6% (yoy), decelerating compared with conditions one month earlier. This was accounted for by flagging economic activity that has undermined demand for money, including loans. Bank Indonesia will continue to ensure adequate liquidity in the money market and banking industry in order to support the national economic recovery, particularly in terms of bank loan restructuring.
Financial system stability has been maintained, although the potential risks associated with COVID-19 transmission on financial system stability must still be anticipated. Financial system stability was reflected by a high Capital Adequacy Ratio (CAR) in April 2020 of 22.03% along with a low level of non-performing loans (NPL) at 2.89% (gross) and 1.13% (nett). Nevertheless, the bank intermediation function remains suboptimal in line with weak domestic demand and more cautious bank lending as a result of COVID-19, which demands attention as growth of outstanding loans disbursed by the banking industry slumped to 5.73% (yoy) in April 2020. In contrast, deposit growth accelerated to 8.08% (yoy) in the reporting period, with room for further improvement. Bank Indonesia continues to maintain an accommodative macroprudential policy stance in line with the current policy mix and national policy mix, including various efforts to mitigate risk in the financial sector caused by COVID-19.
Payment system availability, both cash and non-cash, remains uninterrupted. Growth of currency in circulation shrank by 6.06% (yoy) to a level of Rp798.6 trillion in May 2020, impacted by lower demand due to restrictions on economic activity during the COVID-19 pandemic as well as the postponed Eid-ul-Fitr holiday period. Congruent with less economic activity, cashless transactions using ATM cards, debit cards, credit cards and electronic money sank into a deeper contraction from -4.72% in March 2020 to -18.96% (yoy) in the reporting period. Nevertheless, e-money transactions maintained strong 64.48% (yoy) growth and digital banking transaction volume expanded 37.35% (yoy) in April 2020. Such developments reflect strong demand for digital economic and financial transactions, including greater public acceptance of digital payments during the dip in economic activity caused by large-scale social restrictions. Moving forward, Bank Indonesia will continue to improve the effectiveness of payment system policy in the New Normal era, particularly in terms of digital economic activity through broader QRIS implementation in various sectors. Furthermore, Bank Indonesia continues to support various government programs for national economic recovery, including cashless social aid program (bansos) disbursements and the Made in Indonesia Movement by providing payment system infrastructure and convenient use of payment instruments.”
www.CentralBankNews.info