Economic Update:
Bank Indonesia Maintains The Key Rate At 4.75%
Bank Indonesia Maintains The Key Rate At 4.75%
Bank Indonesia (BI) board of governors’ meeting maintained the BI
7-day (Reverse)Repo rate, the benchmark policy rate,at 4.75% on 15Dec2016.
Moving forward, we expect the BI to slash its key policy rate by another 25bps
in 2017 to support economic growth under stable IDR circumstanceson:
1. Moderate inflation;
2. Manageable current account
deficit;
However, IDR volatility could delay key policy rate cut.
¨ Similarly, deposit
facility and lending rateswere maintained at 4% and 5.5% respectively.BI
believes that the move is consistent with efforts to optimise domestic economic
recovery while maintaining macroeconomic stability. This is against a backdrop
of uncertain global financial markets, especially relating to US and China
policies, as well as domestic risks relating to administered prices inflation.
BI considers the previous monetary and macroprudential policy easingwould
continue to boost domestic growth momentum. Furthermore, inflation in 2016 is
expected to ease to near the floor of the target range of 3-5% in the 3-3.2%
range.
¨ BI
predicts the exports contraction persisted but has shown improvements in 4Q, which
will bring growth to around 5% this year.Nevertheless, the economy is projected
to expand in 2017, in the 5-5.4% range, buoyed by solid domestic demand an an
export recovery.Overall, we areof the view that moderate inflation, recent
government deregulation, the successful implementation of the tax amnesty bill,
and BI’s aggressive monetary easing would likely boostconsumption and private
investment moving forward. In addition, prices of Indonesia’s major commodities
are rising, such as crude palm oil (CPO), coal, and metal that would support
rural household spending.
¨ On the
global economic outlook, the BI expects global risks to demand vigilance. These include
the uncertain fiscal and international policy direction of the United States,
as well as the economic rebalancing and financial system restructuring process
in China.The US growth has shown signs of recovery, on the back of a stronger
labour sector and rising inflation. In line with that, the Fed fund rate was
hiked in Dec 2016, with a tendency to increase further in 2017, potentially
elevating the cost of borrowing in the global market. Meanwhile, growth in
emerging economies, particularly China and India are predicted to continue to
drive the global economy and recovery in several commodity prices
¨ Indonesian
financial system remains stable. This wasunderpinned by a
resilient banking system and relatively sound financial markets.In October, the
capital adequacy ratio (CAR) of banks remained high at 22.9%, which is above
the minimum threshold of 8%. At the same time, non-performing loans (NPL)
remained relatively stable at3.2% (gross) or 1.5% (net) of total loans.
Meanwhile, deposit and loan growth increased to 6.5% and 7.5% YoY in October,
up from +3.2% and +6.5% in September.
¨ Going forward, we believe
inflation would likely remain managebale in 4Q16 and in 2017 due to relatively
low fuel prices and stable domestic demand. In addition, the current account
deficit in the balance of payments would likely be moderate although IDR may
continue to face external headwinds, as expectation on the US raising interest
ratesfurther next year has increased. This would likely provide room, albeit
limited, for the BI to maintain its loose monetary and macroprudential policy.
For next year, we expect the BI to slash its key policy rate by another
25bps in 2017 to support economic growth under stable IDR circumstances.
Kindly click the following link for the full report: Bank Indonesia Maintains The Key Rate At 4.75%
Rizki Fajar
Vice President
Economist
PT. RHB Securities
Indonesia
