Indonesia Lowers Key Rate to 6.5%

Indonesia's central bank unexpectedly cut its benchmark interest rate by 25 bps to 6.5 percent at its June 16th 2016 meeting, mentioning benign inflation, a relatively stable currency and a narrowing current account deficit. It is the fourth cut so far this year, as central bank tries to spur economic growth. Policymakers also slashed its overnight deposit facility rate and lending facility rate by 25 basis points to 4.5 percent and 7 percent respectively.
Bank Indonesia | Mojdeh Kazemi | 6/16/2016 3:20:19 PM
Excerpt from the statement by the Bank Indonesia:

Bank Indonesia will ease macroprudential policy while maintaining compliance to prudential principles[1] by: (i) relaxing the loan-to-value ratio (LTV) and financing-to-value ratio (FTV) on housing loans/financing as attached; and (ii) relaxing partially prepaid loans/financing pursuant to regulations concerning phased loan/financing in line with the construction progress of the associated property as a second loan/financing facility. Furthermore, to boost banking credit Bank Indonesia 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%. The new macroprudential policies will take effect in August 2016.

Domestic economic growth was observed to improve in the second quarter of 2016, albeit not as strong as previously predicted. Household consumption was noted to increase as retail sales surged during the approach the Eid-ul-Fitr and annual bonuses were disbursed. Despite a further surge in government capital spending, investment, especially non-construction investment, showed no significant signs of growth. Concerning the external sector, limited export growth was recorded with exports of several commodities beginning to pick up. Bank Indonesia perceives the need for additional measures to stimulate domestic demand and, therefore, strengthen economic growth momentum. Consequently, domestic economic growth is projected to be in the range of 5.0-5.4% (yoy) in 2016.

Indonesia’s trade balance recorded a surplus in May 2016, primarily supported by a non-oil and gas trade surplus. The trade surplus stood at USD0.38 billion, lower than USD0.66 billion the month earlier. A seasonal increase in oil imports during the run up to Ramadan and Eid-ul-Fitr contributed to the lower trade surplus. The trade surplus was still in line with the projected current account deficit in the second quarter of 2016. 

The rupiah strengthened in June 2016, after depreciating the month earlier as risk accumulated on global financial markets due to the expected FFR hike. On average, the Rupiah depreciated 1.95% (mtm) to a level of Rp13,434 per USD in May 2016. Depreciatory pressures, which were also felt in other countries, were triggered by global risks associated with the proposed FFR hike. The Rupiah rebounded at the beginning of June 2016, however, as foreign capital flowed back into Indonesia after weaker-than-expected labour data was announced in the United States. The Federal Reserve’s decision to postpone the FFR hike at the FOMC on 15th June 2016 should help stabilise the Rupiah. Looking forward, Bank Indonesia will continue to maintain exchange rate stability in line with the rupiah’s fundamental value.

Financial system was stable, with a resilient banking system. In April 2016, the Capital Adequacy Ratio (CAR) stood at 21.7%, while the ratio of non-performing loans (NPL) was recorded at 2.9% (gross) and 1.5% (net). Looser monetary policy was transmitted through the interest rate channel, as reflected by lower deposit and lending rates in the banking industry. In contrast, monetary policy transmission through the credit channel was not optimal. The Federal Reserve’s decision to postpone the FFR hike at the FOMC on 15th June 2016 should help stabilise the rupiah. Credit growth continued to decelerate from 8.7% (yoy) in March 2016 to 8.0% (yoy) in April 2016. Similarly, deposit growth slowed to 6.2% (yoy) in April 2016 from 6.4% (yoy) the month earlier. Bank Indonesia considers the need for looser policy to catalyse credit growth on both the supply and demand sides in order to bolster future economic growth.

Indonesia Lowers Key Rate to 6.5%