Economic Highlight:
BI Mantained The Benchmark Rate at 6.50% and the BI 7-Day (Reverse) Repo Rate at 5.25%
BI Mantained The Benchmark Rate at 6.50% and the BI 7-Day (Reverse) Repo Rate at 5.25%
¨ Bank Indonesia (BI) board of governors’
meeting decided to maintain the BI rate at 6.50% on 21st July 2016. Similarly, the
lending and deposit facility rates were also maintained at 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
maintained as well at 5.25%. The decision was made given that inflation remains
low, current account deficit remains healthy and the
currency is relatively stable. Meanwhile, BI assures that looser monetary and
macroprudential policies will bolster economic growth momentum in the period
ahead.
¨ Elsewhere, BI on 21st July
2016 said that it supports the implementation of the 2016 Tax Amnesty Law
which is expected to boost government’s fiscal capacity to finance development
programme as well as potentially enhance national economic liquidity and it
will be utilized domestically for productive economic activities.
¨ Separately, the BI maintained
its projected economic growth for 2016 at a range of 5.0–5.4%. BI, however,
expects the economy to gain traction although the momentum was still modest
in 2Q, on the back of an increase in household consumption, as retail and
car sales surged in preparation for Eid Fitr festivity and annual bonuses
payout. We are of the view that easing inflation, recent government
deregulation, tax amnesty bill, and BI’s monetary easing will likely boost
consumption, exports, and private investment in the later part of this year. In
addition, the prices of several commodities from Indonesia are rising, specifically
coal and crude palm oil (CPO).
¨ On the global economic outlook,
the BI acknowledged that growing uncertainty after Brexit may result in slower
growth of the global economy. Meanwhile, despite indications of a pick-up in
economic activities in the United States, the impact of the Brexit on USD
appreciation could delay the Fed rate hike until the end of 2016.
¨ 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 22.2%, which is above the minimum threshold of 8%. At the same
time, non-performing loans (NPL) remained relatively stable at 3.1% (gross) or
1.5% (net) of total loans. Credit growth was faster at 8.3% y-o-y in May, up
from +8.0% in the previous month, while deposit growth accelerated to 6.5%
y-o-y during the month. Thus far, the looser monetary policy has resuled in
lower deposit and lending rates even though the transmission through credit
channel has 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 the balance of payments for
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 rate hike abates. This will likely provide room for
the BI to loosen its monetary policy. Further out, the BI will soon replace its policy
rate with the 7-Day (Reverse) Repo rate in August, which currently stands at
5.25%. In 2H 2016, we expect another cut in 7-Day (Reverse)
Repo rate by 25bps if the economic growth in 2Q remains soft and given that BI mentioned
there is still a need for additional policy easing to
stimulate growth.
Best
regards,
Rizki Fajar
Rizki Fajar
Vice President
Economist
PT. RHB Securities
Indonesia
