calendar20 September 2022

No. 21/68/DKom
The BI Board of Governors agreed on 18th and 19th September 2019 to lower the BI 7-day Reverse Repo Rate by 25 bps to 5,25%, Deposit Facility (DF) rates lowered 25 bps to 4,50% and Lending Facility (LF) rates lowered 25 bps to 6,00%. The policy is consistent with low inflation projected below the midpoint of the target corridor, attractive returns on domestic financial investment assets and as a pre-emptive measure to stimulate domestic economic growth momentum against a backdrop of global economic moderation. To strengthen the policy mix in terms of building economic growth momentum, Bank Indonesia has relaxed macroprudential policy in order to increase bank lending capacity and catalyse demand for new loans. Furthermore, Bank Indonesia has also refined Macroprudential Intermediation Ratio (MIR)/Sharia MIR by expanding the loan/financing components received by the banks as a source of funds when calculating the MIR/Sharia MIR (Appendix 1). Bank Indonesia has also relaxed: (i) the loan-to-value (LTV) and financing-to-value (FTV) ratios for property loans/financing by 5%; and (ii) down payments on motor vehicle loans in the 5-10% range, while (iii) providing additional LTV/FTV relief on green property loans/financing and down payments on loans for environmentally friendly motor vehicles by 5% respectively (Appendix 2). The amendment will become effective on 2nd December 2019. Meanwhile, payment system policy and financial market deepening will constantly be strengthened to stimulate economic growth.

Bank Indonesia has also strengthened its monetary operations strategy in order to maintain adequate liquidity and increase efficiency in the money market, thus enhancing transmission of the accommodative policy mix. Bank Indonesia has homogenised open market operations instument through implementation of reverse repo tradeable government securities (RR SBN) for all tenors from 7 days - 12 months, while announcing plans to auction 12-month RR SBN to replace 12-month SBI, commencing 4th October 2019. Moving forward, Bank Indonesia will maintain an accommodative policy mix in line with low projected inflation, sustained external stability and the need to build economic growth momentum. Coordination between Bank Indonesia, the Government and other relevant authorities is constantly strengthened in order to maintain economic stability and catalyse domestic demand, while boosting exports and tourism and attracting foreign capital inflows, including foreign direct investment (FDI).

Ongoing trade tensions between the United States and China, accompanied by geopolitical risks, continue to suppress the global economy and amplify global financial market uncertainty. The tit-for-tat imposition of higher import tariffs by the United States and China is stifling world trade volume and global economic growth. The US economy is moderating on declining exports and non-residential investment. In addition, economic growth in Europe, Japan, China and India continues to decelerate on weaker exports, which has fed through to lower domestic demand. The global economic slowdown has triggered lower international commodity prices, including oil, leading to mild inflationary pressures. In response, many countries have introduced fiscal stimuli and relaxed monetary policy. Meanwhile, high global financial market uncertainty has triggered a shift in global funds to safe haven assets, such as government bonds in the United States and Japan as well as gold, although capital inflows to developing economies have been maintained. Prevailing global economic dynamics demand vigilance due to the potential impact on efforts to stimulate economic growth and maintain foreign capital inflows to bolster external stability.

Indonesia's economy remains overshadowed by intense global headwinds. Exports have failed to regain momentum in line with weaker global demand and sliding commodity prices despite several manufacturing exports, such as motor vehicles, maintaining positive growth. Consequently, investment growth remains underwhelming, non-building investment in particular, while national strategic project development continues to prop up building investment. Private consumption has posted limited gains, although social aid program (bansos) disbursements by the government have helped to maintain stable household consumption growth. Moving forward, the policy mix implemented by Bank Indonesia and the Government is projected to maintain national economic growth momentum towards the lower half of the 5.0-5.4% range in 2019 before increasing towards the midpoint of the 5.1-5.5% targeted for 2020.

Indonesia's Balance of Payments is projected to remain solid in the third quarter of 2019, thereby supporting external resilience. Solid BOP performance is backed by a capital and financial account surplus in the form of FDI and portfolio investment. Portfolio investment inflow in July-August 2019 was recorded at USD3.5 billion, attracted by a promising domestic economic outlook and attractive domestic financial investment assets. Meanwhile, the current account deficit is expected to be maintained at a manageable level due to dwindling demand for imports in line with domestic economic rebalancing as exports also retreat from the impact of global economic moderation. The position of reserve assets in Indonesia remains solid, recorded at USD126.4 billion at the end of August 2019, equivalent to 7.4 months of imports or 7.1 months of imports and servicing government external debt, which is well above the international adequacy standard of three months. Looking forward, Bank Indonesia projects a manageable current account deficit in 2019 and 2020 at 2.5-3.0% of GDP, supported by a maintained influx of foreign capital. Furthermore, Bank Indonesia will continue to strengthen policy synergy with the Government and other relevant authorities in order to increase external resilience, while attracting more FDI.

The Rupiah has strengthened in line with solid BOP performance. In September 2019, the rupiah appreciated 0.9% (ptp) and by 1.0% on the August average in 2019. Cumulatively from January until 18th September 2019, therefore, the rupiah has gained 2.3% (ytd). The stronger Rupiah is supported by a well-functioning foreign exchange supply and demand mechanism from business sectors in addition to maintained foreign capital inflows. Moving forward, Bank Indonesia predicts Rupiah exchange rate stability in line with maintained market mechanisms. That projection is backed by the prospect of sustained foreign capital inflows to Indonesia in line with the sound domestic economic outlook and attractive returns on financial instruments as well as the positive impact of looser monetary policy in advanced economies. To support exchange rate policy effectiveness and strengthen domestic financing, Bank Indonesia continues to accelerate financial market deepening efforts in the money market and foreign exchange market through Central Counterparty (CCP) interest rate derivatives and over-the-counter instruments as well as regulations for market operators.

Low and stable inflation remains under control. CPI inflation in August 2019 was recorded at 0.12% (mtm), decreasing from 0.31% (mtm) the month earlier. Annually, headline inflation in August 2019 stood at 3.49% (yoy), up slightly from 3.32% (yoy) in the previous period. Inflation was supported by controlled core inflation in line with anchored inflation expectations due to policy consistency by Bank Indonesia to maintain price stability, manage aggregate demand and minimise the impact of global prices. Core inflation has been edged up over the past few months by rising international gold prices as well as the second-round effect of higher volatile food (VF) inflation. The latest developments, however, point to lower VF inflation in line with maintained foodstuff supply. Meanwhile, administered prices recorded deflation in the reporting period due to lower transport fares, airfares in particular due to implementation of the airlines’ low season strategy. Moving ahead, Bank Indonesia will consistently maintain price stability and strengthen policy coordination with the central and regional governments to control inflation. Therefore, Bank Indonesia projects inflation in 2019 below the midpoint of the 3.5%±1% target corridor and within the target range for 2020, namely 3.0%±1%.

Effective monetary policy transmission has been underpinned by adequate liquidity in the banking industry coupled with a stable and efficient money market. Liquidity in the interbank money market has been maintained, as reflected by a high average daily transaction volume of Rp20.03 trillion in August 2019. Furthermore, an uptick in the ratio of liquid assets to deposits from 19.1% in June 2019 to 19.7% in July 2019 demonstrated adequate liquidity in the banking system. This contributed to convergence of the overnight interbank rate, as the operational target of monetary policy, with the policy rate of 5.50% in August 2019. The weighted average deposit rate fell 10 basis points on the previous period to 6.70% in August 2019, while lower interest rates on investment loans and working capital loans were the main drag on lending rates, which have begun to decline. Growth of narrow money (M1) and broad money (M2) in July 2019 was recorded respectively at 7.4% and 7.8% in line with national economic growth. Bank Indonesia will continue to ensure adequate liquidity and improve efficiency in the money market, while strengthening the transmission of accommodative monetary policy.

Financial system stability has been maintained, accompanied by contained credit risk and a solid intermediation function. This was reflected by another high Capital Adequacy Ratio (CAR) of 23.1% recorded in July 2019, coupled with a low level of non-performing loans at 2.6% (gross) or 1.2% (nett). Meanwhile, credit growth moderated slightly from 9.9% (yoy) in June 2019 to 9.6% (yoy) in July 2019, weighed down by limited demand for corporate loans. In contrast, deposit growth accelerated to 8.0% (yoy) in July 2019 from 7.4% (yoy) in June 2019. Maintained financial system stability has also been supported by sound performance amongst public listed corporations together with robust repayment capacity. Bank Indonesia believes that the accommodative monetary and macroprudential policy mix will effectively stimulate credit growth without disrupting financial system stability. Bank Indonesia projects growth of outstanding loans disbursed by the banking industry in the 10-12% (yoy) range in 2019 and 11-13% (yoy) in 2020, while projecting deposit growth in the 7-9% (yoy) range in 2019 and 8-10% (yoy) in 2020.

The payment systems, both cash and non-cash, remain uninterrupted. The position of currency in circulation grew 4.5% (yoy) in August 2019, while non-cash payment transactions using ATM/debit cards, credit cards and electronic money grew 14.6%, dominated by ATM/debit cards with a 94.0% share. Growth of e-money transactions remained high in July 2019, reaching 261.2% (yoy), indicating greater public uptake of digital currency and broader e-money integration in the digital ecosystem. Bank Indonesia constantly strives to maintain an uninterrupted payment system to support development of the digital economy and finance. On 1st September 2019, Bank Indonesia refined the operational policy of the National Clearing System (SKNBI) in order to accelerate and improve the efficiency of fund transfers. Electronification has also been strengthened through closer coordination across authorities in order to optimise disbursement and absorption of non-cash social aid programs, the integration of different transportation modes as well as the electronification of traders at traditional markets and local government financial transactions.

Jakarta, 19th September 2019

Onny Widjanarko
Executive Director