Economic Highlight:
BI Cut The Benchmark Rate to 6.50% and the BI 7-Day (Reverse) Repo Rate at 5.25%
BI Cut The Benchmark Rate to 6.50% and the BI 7-Day (Reverse) Repo Rate at 5.25%
¨ Bank Indonesia (BI) board of governors’
meeting decided to cut the BI rate to 6.50% on 16th June 2016. Similarly, the
lending and deposit facility rates were also cut to 7.00% and 4.50%
respectively. In addition, BI announced that the BI-7 Day (Reverse) Repo rate,
which will become the benchmark rate effective on 19 August 2016, would be cut
as well to 5.25%. The decision was made given that inflation is moderating, while current account deficit and currency are
relatively stable. Furthermore, the BI was taking a window of opportunity to
ease policy, as expectations on the US Fed to raise interest rates are abating.
BI perceives there is a need for additional easing to stimulate domestic
demand and catalyse credit growth on both the supply and demand sides in
order to bolster future economic growth.
¨ Elsewhere, BI on 16th June
2016 said that it will ease macroprudential policy while maintaining
compliance to prudential principles by relaxing the loan-to-value (LTV) and
financing-to-value ratio (FTV) on housing loans/financing. Furthermore, to
boost banking credit, BI will also raise the floor on the Reserve Requirement –
Loan to Financing Ratio (RR-LFR) from 78% to 80%, with the ceiling maintained
at 92%. All these policies will take effect in August 2016.
¨ Separately, the BI maintained
its projected economic growth for 2016 at a range of 5.0–5.4%. BI, however,
predicts the economy to improve in 2Q, albeit not as strong as previously
predicted, on the back of an increase in household consumption, as retail
sales surge in preparation for Eid Fitr festivity and its allowance disburse.
We are still of the view that easing inflation, recent government deregulation
and BI’s monetary easing will likely boost consumption, export, and private
investment in the later part of this year. In addition, the prices of several
commodities from Indonesia are rising, including crude palm oil (CPO), coal,
rubber, and lead.
¨ On the global economic outlook,
the BI acknowledged that sluggish global economic growth and low inflation in
Japan and Europe forced the European Central Bank (ECB) and Bank of Japan (BOJ)
to extend their loose monetary policy. In addition, the Brexit could reignite
pressures on global financial markets. Meanwhile, China’s economy was again
under threat as investment slows, along with production and consumption.
Moreover, the US economic growth is not yet solid. Consequently, the Fed will
likely act cautiously in adjusting the Fed Fund Rate (FFR).
¨ Indonesian financial system
remained stable, underpinned by a resilient banking system and relatively sound
financial markets. In April 2016, the Capital Adequacy Ratio (CAR) of banks
remained high at 21.7%, which is above the minimum threshold of 8%. At the same
time, non-performing loans (NPL) remained relatively stable at 2.9% (gross) or
1.5% (net). Credit growth was slower at 8.0% y-o-y in April, down from +8.7% in
previous month, while deposit growth decelerated to 6.2% y-o-y during the
month. Moreover, the looser monetary policy has transmitted to lower deposit
and lending rates even though transmissions through credit channel have yet to
reach an optimum level.
¨ Going forward, we believe
inflation will likely ease in 2016 due to lower fuel prices and soft domestic
demand. In addition, the current account deficit in 2016 will likely be
maintained at a manageable level. Furthermore, the deluge of foreign capital
inflows and lower foreign exchange demand in the domestic market will likely
continue to provide a support to the rupiah, as expectations on the US raising
interest rates abate. This will likely provide room for the BI to loosen its
monetary policy. Nevertheless, as the BI will soon replace its policy rate with the
7-Day (Reverse) Repo rate in August, which currently stand at of 5.25%, and the
inflation will reach its peak next month, we foresee the BI to maintain the BI
rate at 6.5% in July, the last month of transition period. Further out, we
expect another cut in 7-Day (Reverse) Repo rate by 25bps if the economic growth
in 2Q remains soft as BI still mentioned a need for additional easing to
stimulate growth. (Rizki Fajar)
Kindly click the following link for the full report: BI Cut The Benchmark Rate to 6.50% and the BI 7-Day (Reverse) Repo Rate at
Best regards,
Rizki Fajar
Vice President
Economist
PT. RHB Securities
Indonesia
