MONETARY POLICY STATEMENT

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2 TINJAUAN MONETARY KEBIJAKAN POLICY MONETER REVIEW 1 MONETARY POLICY STATEMENT The BI Board of Governors agreed on 16-17th March 2016 to lower the BI Rate 25 basis points (bps) to 6.75%, with the Deposit and Lending Facility rates at 4.75% and 7.25% respectively, effective 18th March The move is consistent with greater room to ease monetary policy along with a solid macroeconomic stability, specifically indicated by the persistently less intense inflationary pressures in 2016 and 2017, while uncertainties in the global financial market decreased. Amid a sluggish global economic growth, the lower BI Rate is expected to enhance domestic demand to bolster economic growth momentum, while maintaining macroeconomic stability. The Board of Governors will be cautious in determining future monetary easing, taking into account overall assessments and forecast of domestic macroeconomy and financial systems stability, as well as global economic developments. To enhance the effects of policy transmission, future focus on the short term are on strengthening operational framework through a consistent term structure of monetary operations. Furthermore, Bank Indonesia will also continue to strengthen coordination with the Government to control inflation, support growth stimuli and ensure structural reforms remain on track, thereby underpinning sustainable economic growth moving forward. The global financial markets uncertainty has decreased, with the expected gradual hike of the Fed Fund Rate (FFR) and negative policy rate in Japan and Europe. Global growth on 2016 and 2017 is expected to be lower than previously expected, with sluggish economic recovery in several advanced countries and economic slowdown in developing countries. Sluggish economies and low inflation in Japan and Europe forced the European Central Bank (ECB) and Bank of Japan (BOJ) to extend loose monetary policy through liquidity injection and negative interest rate policy correspondingly. The People s Bank of China (PBoC) has lowered the Reserve Requirement Ratio in order to stimulate the flagging domestic economy. Meanwhile, The Fed has kept the FFR target at % on March 16th 2016, along with the moderate consumption growth, below target inflation level, and global economic and financial risks. The FFR hike is not expected until the second half of the year, with a lesser magnitude than previously predicted. On commodity markets, the oil price was predicted to remain low, due to abundant supply and dwindling demand. Domestic economic growth has a potential to continue improving throughout the first quarter of 2016 on the coattails of fiscal stimuli acceleration. Economic growth in Q1/2016 is predicted to surpass that posted in the previous period, supported by government consumption and investment. The increased government investment was bolstered by government capital spendings which were accelerated during the first two months of 2016, while the private sector investment is not expected tp increase until future periods. Household consumption remains strong, as reflected by the adequate purchasing power, increased retail sales, and relatively good consumer confidence. Meanwhile, pressures on export will persist in line with global economic moderation and sliding international commodity prices. For 2016, therefore, economic growth is projected in the % (yoy) range, exceeding that achieved the year earlier. 1

3 The trade surplus expanded in February 2016 on the back of a growing non-oil and gas surplus. Indonesia s trade balance recorded a larger surplus of USD1.15 billion in the reporting period, higher than that of the previous month, supported by an increased nonoil and gas trade surplus, stemming mainly from exports of jewellery/gems and articles of iron and steel. In addition, the oil and gas account reversed the deficit reported last month to record a surplus. The trade surplus noted in January-February 2016 is consistent with the projected current account deficit in the first quarter of the year. The current account deficit is expected to be covered by the surplus in financial account, boosted by a stream of portfolio investment through to February 2016 which amounted to USD2.2 billion. A positive flow of foreign capital onto the domestic stock market was also recorded, along with the increasingly promising domestic economic outlook. The position of official reserve assets at the end of February 2016 stood at USD104.5 billion, equivalent to 7.6 months of imports or 7.3 months of imports and servicing public external debt, which is well above the international adequacy standard of three months. The deluge of foreign capital inflows and a decrease of foreign exchange demand in the domestic market prompted Rupiah appreciation. In February 2016, the Rupiah appreciated 3.09% (ytd) to a level of Rp13,372 per USD. The Rupiah appreciation trend was bolstered by inflows of foreign capital, including to the stock market. On the home front, the Rupiah appreciated on the positive perception of investors concerning the promising economic outlook after the BI Rate was lowered, the government introduced policy packages aimed at improving the investment climate, and the effective implementation of infrastructure projects. A decrease of foreign exchange transaction between Indonesian citizens, following the Bank Indonesia regulation concerning mandatory use of Rupiah, from an average of US$7.3 billion to less than US$3 billion has also supported the Rupiah appreciation. Externally, easing risk on global financial markets along with the monetary easing policy of several advanced economies have helped further Rupiah appreciation. Looking ahead, Bank Indonesia will continue to maintain exchange rate stability in line with the currency s fundamental value. Inflation in February remained under control, thereby supporting achievement of the inflation target in 2016 at 4±1%. The Consumer Price Index (CPI) recorded deflation of 0.09% (mtm) in the reporting period, supported by deflation in both administered prices and volatile foods. The deflation of administered prices is mainly contributed by a decrease in household fuel price, along with lower electricity tariffs and airfares. In terms of volatile foods, a correction to most food prices was recorded, with the exception of rice prices due to the ongoing El Nino weather phenomenon. Core inflation remained low and stable at 0.31% (mtm) or 3.59% (yoy) in line with anchored inflation expectations and limited domestic demand. Going forward, the downward oil price trend is expected to further alleviate inflationary pressures. Bank Indonesia projects inflation to stay within the target corridor in 2016, namely 4±1%. Furthermore, policy coordination between Bank Indonesia and the Government will be enhanced to control inflation in anticipation of possible inflationary pressures on volatile foods. Financial system stability was maintained, underpinned by a resilient banking system and relatively stable financial markets. In January 2016, the Capital Adequacy Ratio (CAR) stood at 21.5%, while non-performing loans (NPL) were recorded at 2.7% (gross) or 1.4% (net). Despite global and domestic economic moderation triggering sluggish corporate performance in several manufacturing subsectors and the infrastructure sector, the impact on banking system resilience was limited. In terms of the intermediation function, credit growth slowed from 10.4% (yoy) last month to 9.6% (yoy). Deposit growth 2

4 also decelerated in January 2016, from 7.3% (yoy) to 6.8% (yoy). The dual monetary easing of BI Rate and primary reserve requirement, that is starting to transmit to banking rate, is expected to boost liquidity and increase credit growth. Furthermore, in order to support transmission of the lower policy rate, the term structure of monetary operations was also adjusted. 3

5 2 THE ECONOMY AND MONETARY POLICY Global Economic Performance Global financial market uncertainty has eased in line with the expected gradual increase of the Fed Fund Rate (FFR) and negative policy rate in Japan and Europe. Global growth in 2016 and 2017 is predicted at a lower level than previously projected, with a sluggish economic recovery in several advanced countries and an economic downshift in developing countries. Weak economies and low inflation in Japan and Europe forced the European Central Bank (ECB) and Bank of Japan (BOJ) to extend loose monetary policy through liquidity injections and negative interest rate policy correspondingly. Furthermore, the People s Bank of China (PBoC) lowered the Reserve Requirement Ratio in order to stimulate the flagging domestic economy. Meanwhile, The Fed maintained the FFR target at % on 16 th March 2016, consistent with moderate consumption growth, below target inflation as well as global economic and financial risks. The FFR hike is now not expected until the second half of the year and of a lesser magnitude than previously predicted. On commodity markets, the oil price was predicted to remain low due to abundant supply and dwindling demand. Lingering pessimism in Europe forced the European Central Bank (ECB) to extend its loose monetary policy stance. The policy response of the ECB was prompted by lower projected inflation in 2016, revised down from 1% to just 0.01%, along with GDP in 2016 that was corrected from 1.7% to 1.4% in line with the sluggish global economic growth and soft oil price. At its meeting on 10 th March 2016, the ECB reduced its Main Refinancing Rate by 5 basis points to 0%. Furthermore, the ECB also lowered the Marginal Lending Facility Rate and Deposit Facility Rate by 5bps and 10bps respectively to 0.25% and -0.4%. In addition, the ECB also extended its asset purchase program (QE) from EUR60 billion to EUR80 billion per month, while expanding eligible assets to include nonbank corporate bonds. The inauspicious economic outlook and low inflation in Japan also compelled the Bank of Japan (BOJ) to loosen monetary policy. The Japanese economy contracted due to slumps in consumption and corporate activity. In addition, inflation also declined in line with sliding commodity prices. Such conditions forced the Bank of Japan (BOJ) to maintain a negative policy rate in order to bring down real interest rates and drive investment and consumption. The People s Bank of China (PBoC) lowered the reserve requirement ratio in order to stimulate the flagging domestic economy. Domestic demand remained sluggish, evidenced by weak retail sales data. Furthermore, real sector activities slowed, which exacerbated the manufacturing sector contraction. Ongoing economic moderation in China prompted Moody s to lower the outlook for China from stable to negative. Additionally, the domestic economic downturn also forced the People s Bank of China (PBoC) to lower the RRR by 50 basis points to 17%, which is expected to create CNY billion (USD billion) in extra liquidity. 4

6 The Federal Reserve maintained the target Federal Funds Rate (FFR) at its meeting held on 16 th March The move was consistent with an economic outlook that remains torpid and ongoing risks on global financial markets. US inflation increased, however, in January 2016 on the back of higher core inflation stemming from the services sector and the base effect. Notwithstanding, inflation still remained below target (Graph 2.1). Externally, the potential for weaker global economic growth than previously projected remained. Pressures continued to overshadow global financial markets due to uncertain financial markets in China. Such unfavourable domestic and external conditions forced the Fed to maintain its FFR target at % (Table 2.1). Furthermore, the Federal Funds Rate (FFR) is now not expected to be raised again until the second half of the year and to a lesser degree. Graph 2.1. CPI, PCE and PPI Inflation Table 2.1. FFR Current Implied Probability On commodity markets, the crude oil price is projected to decline on abundant supply combined with dwindling demand. A Bloomberg Survey, the Brent futures and EIA projections point to prices in 2016 and 2017 at USD37 per barrel and USD47 per barrel respectively, down from USD40 and USD49 projected the month earlier. Global supply is expected to increase in 2016, however, in line with greater supply from OPEC members (Graph 2.3), in particular an increase in production in Iran after sanctions were lifted (Nuclear Deals) on 16 th January Meanwhile, the majority of other OPEC members are expected to maintain current levels of oil production. On the other hand, global demand for oil is projected to decline in line with economic moderation. Consequently, lower oil prices prompted a correction to projected international commodity prices. Graph 2.2. Brent Oil Price Graph 2.3. World Oil Production and Consumption 5

7 Economic Growth Domestic economic growth has the potential to continue improving throughout the first quarter of 2016 on the coattails of accelerated fiscal stimuli. Economic growth in Q1/2016 is predicted to surpass that posted in the previous period, supported by government consumption and investment. Increased government investment was bolstered by government capital spending that accelerated during the first two months of 2016, while private sector investment is only expected to increase in upcoming periods. Household consumption remains strong, as reflected by adequate public purchasing power, increased retail sales and relatively solid consumer confidence. Meanwhile, pressures on exports will persist in line with global economic moderation and sliding international commodity prices. For 2016, therefore, economic growth is projected in the % (yoy) range, exceeding that achieved the year earlier. Government consumption and investment are projected to increase, thereby precipitating domestic economic gains in the first quarter of Increased government investment was bolstered by government capital spending that accelerated during the first two months of 2016 in line with infrastructure projects for 2016 tendered in Fiscal expansion spurred stronger construction investment performance, reflecting an upward trend of heavy equipment (Graph 2.4) and cement sales. Meanwhile, private investment is only expected to pick up in future periods, indicating the persistent wait-andsee attitude of investors as business sentiment is yet to improve (Graph 2.5). Such conditions have led to weak non-construction investment, evidenced by sluggish sales of heavy equipment as well as imports of capital goods, transportation equipment and machinery. Graph 2.4. Sales of Construction Equipment Graph 2.5. Business Sentiment Index Solid household consumption is predicted to endure in the first quarter of Furthermore, public purchasing power has been maintained on gains in consumer confidence. According to the Consumer Survey conducted by Bank Indonesia, both components of consumer confidence increased, namely consumer optimism concerning current economic conditions as well as expectations of future conditions (Graph 2.6). Resilient household consumption was evidenced by an increase in retail sales, in particular sales of household and communications equipment (Graph 2.7). Other indicators of household consumption, such as motorcycle sales, also showed signs of improvement despite the ongoing contraction. 6

8 Graph 2.6. Consumer Confidence Index Graph 2.7. Retail sales Externally, export performance was depressed by the lacklustre global economic recovery and tumbling international commodity prices. World trade volume declined in line with projections of sluggish global growth, especially in emerging market countries. Meanwhile, commodity prices fell more sharply, consistent with the lower oil price. Export performance also declined on mining and manufacturing exports (Graph 2.8). Mining exports contracted due to license extension issues, while manufacturing exports contracted more deeply on fewer shipments of crude palm oil (CPO) as demand from China and India subsided. In contrast, agricultural exports surged on the back of consignments of fish and spices. The import contraction was predicted to ease in Q1/2016 in line with stronger domestic demand. Increased domestic demand prevented a further contraction of raw material imports, while boosting imports of consumer goods. Meanwhile, imports of capital goods contracted more deeply after imports of industrial transportation equipment declined. Graph 2.8. Real Non-Oil and Gas Export Growth Economic gains were observed to affect nearly all sectors, especially the construction sector as well as the transportation and communications sector. The construction sector benefitted from the greater realisation of government infrastructure projects, reflecting increased sales of heavy equipment (Graph 2.4) and cement. In terms of the transportation subsector, improvements to various infrastructure, such as airports and train stations, were expected to occasion an increase in passengers. Furthermore, proposed strategic telecommunications projects buoyed the communications subsector, including the planned 2,700 km fibre optic network to meet the growing need for a data network in 17 remote cities/regencies in central Indonesia. 7

9 Indonesia Balance of Payments Indonesia s trade balance recorded a surplus of USD1.15 billion in February 2016, surpassing the USD0.01 billion reported last month (Graph 2.9). A broader non-oil and gas trade surplus, coupled with an oil and gas surplus, contributed to the larger trade balance surplus. The non-oil and gas trade surplus stood at USD 1.14 billion in February 2016, expanding from USD0.12 billion in January Growth stemmed from an increase in exports (8.67%, mtm), while corresponding imports declined (2.13%, mtm). The surge of non-oil and gas exports primarily affected shipments of gems/jewellery, articles of iron and steel, ships, vehicles and their components parts as well as tin. Meanwhile, the import decline tended to affect mechanical equipment, weapons and ammunition, cereals, articles of iron and steel as well as iron and steel. The oil and gas trade balance recorded a surplus of USD0.01 billion in February 2016, contrasting the USD0.11 billion deficit reported a month ago. The reversal stemmed from a 0.47% (mtm) increase in exports combined with an 8.79% (mtm) decline of imports. Based on the aforementioned developments, the trade surplus in January and February 2016 remained consistent with the predicted current account deficit in the first quarter of The capital and financial account surplus was adequate to offset the current account deficit in line with an influx of portfolio investment totalling USD2.2 billion in February 2016 (Graph 2.10). Foreign capital flows to the stock market were positive in February 2016 as the domestic economic outlook improved. The position of official reserve assets at the end of February 2016 stood at USD104.5 billion, equivalent to 7.6 months of imports or 7.3 months of imports and servicing public external debt, which is well above the international adequacy standard of three months. Graph 2.9. Trade Balance Graph Flows of Non-Resident Funds to Rupiah Assets Rupiah Exchange Rate The deluge of foreign capital inflows and a decrease of foreign exchange demand on the domestic market prompted rupiah appreciation. In February 2016, the rupiah appreciated 3.09% (ytd) to a level of Rp13,372 per USD. In comparison, rupiah appreciation surpassed that achieved by the Malaysian ringgit and Thai baht, while other 8

10 peer countries experienced depreciation of their respective currencies. Rupiah appreciation was underpinned by a stream of foreign capital inflows in the form of portfolio investment on the stock market, coupled with dwindling domestic demand for foreign currencies after enforcement of the Bank Indonesia regulation concerning mandatory rupiah use in the territory of the Republic of Indonesia. The rupiah appreciated on domestic as well as external factors. At home, rupiah appreciation was driven by a reduction to the BI Rate, the government s policy package to improve the investment climate, and the effective implementation of various infrastructure projects, which buoyed the perception held by investors concerning the economic outlook. Furthermore, enforcement of the new Bank Indonesia regulation on mandatory rupiah use in the territory of the Republic of Indonesia saw foreign currency transactions between residents fall from an average of USD7.3 billion per month to just USD3 billion in January 2016, which also boosted rupiah appreciation. Externally, however, the strong rupiah stemmed from less risk on global financial markets after a number of advanced countries expanded loose monetary policy (Graphs 2.11 and 2.12). Graph Rupiah Exchange Rate Movements Graph Rupiah Appreciation/Depreciation against Peer Currencies Consistent with rupiah appreciation, rupiah volatility also increased but remained under control. Year-to-date, rupiah volatility has remained lower than the average of peer countries and lower than the rand (South Africa), real (Brazil), ringgit (Malaysia), lira (Turkey) and won (South Korea) (Graph 2.13). Graph Regional Exchange Rate Volatility Moving forward, Bank Indonesia will constantly maintain exchange rate stability in line with the currency s fundamental value. A number of external factors will continue to demand vigilance, including financial market conditions in China and the global oil price. 9

11 Inflation Inflation in February 2016 was controlled and supported attainment of the inflation target in 2016, namely 4±1%. The Consumer Price Index (CPI) recorded deflation of 0.09% (mtm) in February 2016 on administered prices and volatile foods. On an annualised basis, CPI inflation stood at 4.42% (yoy) in the reporting period (Graph 2.14). Graph Annual Inflation Core inflation remained low at 0.31% (mtm) or 3.59% (yoy). Low core inflation was attributed to anchored inflation expectations and limited domestic demand. Such conditions were inextricably linked to the role of Bank Indonesia policy in terms of maintaining exchange rate stability and managing inflation expectations. A slight increase was recorded of traded core inflation, while non-traded core inflation tended to slow (Graph 2.15). A number of commodities contributed significantly to core inflation, including gold jewellery, car and rice with side dishes (Table 2.2). Rising domestic gold prices mirrored international prices due to increased demand for the safe haven commodity. Table 2.2. Contributors to Core Inflation/Deflation Graph Core Inflation Retailers and consumers inflation expectations declined. The decline is due to correction to energy prices that triggered lower electricity rates and rupiah appreciation. Nonetheless, retailers and consumers inflation expectations in the next six months are expected to increase, coinciding with the holy fasting month of Ramadhan and Eid-ul-Fitr (Graphs 2.16 and 2.17). 10

12 Graph Retailer s Price Expectations Graph Consumer Price Expectations Volatile foods recorded deflation in February 2016 of 0.68% (mtm) despite experiencing inflation of 7.87% (yoy) on a yearly basis (Graph 2.18). Deflation primarily stemmed from price corrections to shallots, chicken meat and eggs, as well as bird s eye chillies, which far exceeded the spike in rice prices due to the ongoing El Nino weather phenomenon, resulting in volatile food deflation that surpassed seasonal norms. Greater shallot production at hubs such as Nganjuk and Brebes precipitated lower prices. Meanwhile, the harvest of day-old chicks (DOC) combined with corn imports by the Indonesian Bureau of Logistics (Bulog) alleviated price pressures on livestock feed and thus occasioned lower chicken meat end egg prices (Table 2.3). Despite volatile foods recording deflation in general, a number of foods in the basket actually noted inflation. In February 2016, rice recorded inflation of 0.47% (mtm), down from 0.77% (mtm) the month earlier. Rising rice prices were eased by rice imports initiated by the Indonesian Bureau of Logistics (Bulog) along with ongoing rice harvests. Furthermore, the government also agreed in January to allocate an additional 1 million tons of rice imports in Meanwhile, inflationary pressures intensified on fresh fish due to inclement weather and rough seas. Beef prices also tended to increase on the back of market psychology concerning limited supply the month earlier. Table 2.3. Contributors to Volatile Food Inflation/Deflation No. Volatile Food (%,mtm) Contribution (%,mtm) Graph Volatile Food Inflation Deflation 1 Shallots (13.43) (0.08) 2 Chicken meat (3.80) (0.05) 3 Eggs (3.41) (0.03) 4 Birds' eye chillies (13.64) (0.03) 5 carrot (9.77) (0.01) 6 Tomato vegetables (4.93) (0.01) Inflation 1 Rice Fish Red chilli pepper Garlic Beef Administered prices recorded deflation of 0.76% (mtm) or 3.98% (yoy). The rate was below the historical average for of 0.17% (mtm) (Graph 2.19). Administered price deflation stemmed from lower household fuel prices, electricity rates, and airfares as a second-round effect of price corrections in January In addition, electricity rates were lowered in February 2016 from Rp1,409/Kwh to Rp1,392/Kwh. Conversely, a number of administered prices recorded inflation, including filtered clove cigarettes and white cigarettes (Table 2.4). 11

13 Table 2.4. Contributors to Administered Prices Inflation/Deflation Graph Administered Prices Inflation No. Administered Prices (%,mtm) Contribution (%,mtm) Deflation 1 Electricity tariff (4.01) (0.14) 2 Fuel (0.97) (0.04) 3 Household fuels (0.54) (0.01) 4 Air transport fares (0.75) (0.01) Inflation 1 Filter cigarette Clove flavored cigarette Cigarette without clove flavoring By region, less intense national inflationary pressures were supported by deflation observed on the island of Java and in Eastern Indonesia, coupled with minimal inflation on the islands of Sumatra and Kalimantan (Figure 2.1). Deflation was most pronounced in Eastern Indonesia, at 0.19%, primarily in North Maluku. Deflation was also recorded in all provinces of Java and Kalimantan, albeit not as strong as in other regions. In contrast, inflation was reported on the island of Sumatra but inflationary pressures were relatively minimal. Inflation in West Sumatra and the Babel Islands was significant, however, after the prices of filtered clove cigarettes increased along with rice and fresh fish. Inflationary pressures from the three aforementioned commodities was offset by a larger correction to food commodities, including shallots and chicken meat, as well as lower electricity rates and airfares. Meanwhile, rising rice prices, which command the largest weight in the inflation basket, demand continued monitoring as the harvesting season has been postponed in all regions. Notwithstanding, rice inflation nationally remains low. The highest rice prices were found in Gorontalo, Central Sulawesi and Southeast Sulawesi. National inflation: -0,09% Figure 2.1 Distribution of CPI Inflation (%, mtm) Looking ahead, Bank Indonesia confirmed that inflation is projected around the midpoint of the 4±1% inflation target in The downward oil price trend is expected to alleviate inflationary pressures. Furthermore, policy coordination between Bank Indonesia and the Government to control inflation will be strengthened in order to anticipate possible inflationary pressures on volatile foods. 12

14 Monetary Developments The loose monetary policy stance has been transmitted to lower interest rates, while liquidity has been maintained. In January 2016, the interbank rate and term deposit rates were lowered in response to loose monetary policy. On the other hand, lending rates were held despite expectations of reductions over the upcoming months. Liquidity on the interbank money market and in the banking industry was maintained. Slower credit growth undermined growth of liquidity in the economy (M2 or broad money). Congruous with loose monetary policy, the overnight interbank rate was lowered in February In the reporting period, the overnight interbank rate was reduced 25bps from 5.52% the month earlier to 5.27% in response to the lower DF rate and BI Rate (Graph 2.20). In terms of tenor, interbank rates on tenors longer than overnight were lowered more than the O/N rate in line with the large daily liquidity surplus at the beginning of the year. Interbank money market liquidity conditions improved. Accordingly, the max-min spread narrowed to 12bps from 25bps a month ago. Furthermore, average interbank money market volume in February 2016 dropped to Rp12.00 trillion from Rp12.23 trillion the month earlier. The decline in interbank volume was mainly attributed to tenors of longer than overnight, which decreased from Rp5.40 trillion to Rp4.71 trillion. Such conditions, coupled with lower interbank rates, reflected looser liquidity conditions as currency flowed into the banking system and the government expanded fiscal operations at the beginning of the year (Graph 2.21). % rpuab ON BI Rate DF Rate LF Rate 10,0 9,0 8,0 7,0 6,0 5,0 4,0 Jul 13 Aug 13 Sep 13 Oct 13 Nov 13 Dec 13 Jan 14 Feb 14 Mar 14 Apr 14 May 14 Jun 14 Jul 14 Aug 14 Sep 14 Oct 14 Nov 14 Dec 14 Jan 15 Feb 15 Mar 15 Apr 15 May 15 Jun 15 Jul 15 Aug 15 Sep 15 Oct 15 Nov 15 Dec 15 Jan 16 Feb 16 Sumber: LHBU Graph BI Rate, DF Rate and O/N Interbank Rate Graph O/N Interbank Rate and O/N DF Volume Looser monetary policy also perpetuated lower term deposit rates, while lending rates were held despite expectations of imminent reductions in the upcoming periods. In January 2016, the lower term deposit rate trend persisted, prompted by a looser monetary policy stance, which manifested in BI Rate reductions in January and February Furthermore, improved liquidity conditions in the banking sector during January also induced lower term deposit rates as currency flowed into the banking system at the beginning of the year combined with the January effect on credit. In January 2016, the weighted average term deposit rate decreased -6bps to 7.88%. On the other hand, the weighted average lending rate was maintained at 12.83% (Graph 2.22). By loan type, however, lending rates were mixed, with the rate on working capital credit held at 12.46%, while the rate on investment credit was lowered 16bps to 11.96%, contrasting the 6bps hike in the rate on consumer loans to 13.94%. Nonetheless, lending rates are 13

15 expected to rise in the upcoming months. Furthermore, stable lending rates and lower term deposit rates widened the interest rate spread from 489bps to 495bps (Graph 2.23). Graph Interest Rates on Working Capital Credit, Investment Credit and Consumer Loans Graph Bank Interest Rate Spread Liquidity growth in the economy (M2 or broad money) decelerated. In January 2016, M2 growth slowed from 8.9% (yoy) to 7.7% (yoy) on the back of weaker credit growth.credit recorded growth 1 of 9.3% (yoy) in January 2016, down from 10.1% (yoy) the month earlier. In addition, a decline in Net Foreign Assets (NFA) also contributed to slower M2 growth. By component, quasi-money contributed to slower M2 growth. Quasi-money growth (term deposits and savings deposits denominated in rupiah and a foreign currency as well as foreign currency demand deposits) decelerated from 8.4% (yoy) last month to 6.2% (yoy) in January 2016 due to weaker growth of term deposits and foreign currency demand deposits. Meanwhile, M1 growth (currency outside banks and rupiah demand deposits) accelerated from 12.0% (yoy) in December 2015 to 14.0% (yoy) in the reporting period as the central government expanded financial operations at the beginning of the year, departing from historical norms of reining in spending at the onset of a new year (Graphs 2.24 and 2.25). The increase in M1 growth, however, was inadequate to offset the slowdown of quasi-money. Graph M2 Growth and its Components Graph M1 Growth and its Components 1 Credit growth of 9.3% (yoy) in January 2016 was calculated based on the monetary concept, namely rupiah and foreign currency loans extended by commercial and rural banks (excluding bank branches operating internationally) to residents (excluding the central government). In contrast, credit growth according to the monetary concept achieved 9.59% (yoy) in the same period. Pursuant to the banking concept, credit includes rupiah and foreign currency loans disbursed by commercial banks (including those operating internationally) to residents (including the central government) and nonresidents. 14

16 The Banking Industry Financial system stability remained resilient, supported by solid Banking system. Banking industry resilience persisted, with credit, liquidity and market risks well mitigated. Additionally, a high Capital Adequacy Ratio (CAR) helped to maintain the banking industry in general. Credit growth in January 2016 slowed in line with seasonal trends. Typically, credit growth tends to decelerate in January. Based on currency, foreign currency credit growth also slowed despite rupiah appreciation against the USD in January In general, bank credit growth was recorded at 9.59% (yoy) in the reporting month, down from 10.45% (yoy) in December The decline primarily affected working capital credit and investment credit, which declined respectively from 9.04% (yoy) and 14.70% (yoy) to 7.43% (yoy) and 14.01% (yoy). In contrast, consumer loans enjoyed stronger growth in January 2016, accelerating from 9.09% (yoy) to 9.29% (yoy) (Graph 2.26). Looking forward, credit growth is projected to improve. Looser monetary policy, instituted through reductions to the BI Rate and reserve requirement, which has begun to be transmitted to bank interest rates, should boost liquidity and spur credit growth. In addition, the term structure of monetary operations was also adjusted in order to support transmission of the lower policy rate. By sector, slower credit growth in January 2016 affected a number of economic sectors. Lending to the trade sector and manufacturing industry fell on the month earlier to 9.7% (yoy) and 12.4% (yoy). Conversely, credit disbursed to the agricultural sector, corporate services sector and utilities sector was observed to increase from 19.9% (yoy), 5.4% (yoy) and 22.6% (yoy) to 20.0% (yoy), 8.0% (yoy) and 24.3% (yoy) (Graph 2.27). Graph Credit Growth by Loan Type Graph Credit Growth by Economic Sector In January 2016, deposit growth also decelerated. Deposits grew 6.80% (yoy) in the reporting period, dropping from 7.26% (yoy) the month earlier. The decline affected term deposits, while demand deposits and savings deposits posted stronger growth. Accordingly, term deposit growth slipped from 4.60% (yoy) to 2.70% (yoy), while demand deposits and savings deposits accelerated from 11.01% (yoy) and 8.69% (yoy) to 12.52% (yoy) and 9.29% (yoy) respectively (Graph 2.28). 2 Based on the banking concept. 15

17 Graph Deposit Growth Against a backdrop of economic moderation, banking industry resilience was maintained, supported by mitigated credit risk and a solid Capital Adequacy Ratio (CAR). In January 2016, the Capital Adequacy Ratio (CAR) stood at 21.51%, well above the 8% threshold, reflecting solid banking system resilience in the face of economic shocks. Furthermore, non-performing loans (NPL) remained low and stable at 2.73% (gross) or 1.40% (net) (Table 2.5). Despite domestic and global economic moderation undermining corporate performance in the manufacturing subsector and infrastructure sector, the impact on banking system resilience was comparatively limited. Table 2.5. General Banking Conditions Primary Indicators Mar Jun Sep Dec Jan Total Asset (T Rp) 5, , , , , Third Party Fund (T Rp) 4, , , , , Credit* (T Rp) 3, , , , , LDR* (%) NPLs Gross* (%) CAR (%) NIM (%) ROA (%) The Stock Market and Government Securities Market The domestic stock market rallied in February 2016 on the back of external dynamics. The Jakarta Composite Index (JCI) climbed 156 points (+3.4%) to close at a level of 4, on 29 th February The JCI experienced corrections in the first and second weeks of the reporting month due to the sliding global oil price together with weak economic and inflation data released in the United States, which reignited concerns over further global economic headwinds. Notwithstanding, positive sentiment after the oil price rebounded and the European Central Bank (ECB) confirmed further quantitative easing measures triggered non-resident buys, thus driving up the JCI in week 4 of February Domestically, stronger-than-expected GDP data released in Indonesia further buoyed positive sentiment on the stock market. The Jakarta Composite Index (JCI) outperformed regional bourses. Accordingly, the JCI rallied 3.38%, exceeding the 2.60% achieved in Vietnam and 2.4% in Thailand. 16

18 Conversely, the largest corrections were found to affect the bourses of India (-7.5%) and China (-2.9%) (Graph 2.29). The majority of sectoral indices were bullish. The JCI rally was supported by gains on most sectoral indices in February 2016, most notably the consumption sector (9.8%), followed by the mining sector (6.3%). In contrast, the indexes for infrastructure and agricultural sector experienced corrections (Graph 2.30). Graph JCI and Global Stock Graph Sectoral Indices Indices In February 2016, non-resident investors booked a net buy on the domestic stock market. Non-resident investors booked a net buy of Rp4.1 trillion in the reporting period, contrasting the net sell of Rp2.32 trillion in the previous period (Graph 2.31). Non-residents bought stocks on growing optimism concerning the favourable domestic economic outlook coupled with easing global financial market uncertainty. Risk perception on the stock market also subsided, thereby encouraging non-residents to buy domestic financial instruments. Consequently, the portion of non-resident investors on the domestic stock market in February 2016 was observed to increase from 44.4% to 48.0% (Graph 2.32). The tradeable government securities (SBN) market also performed positively in February 2016 on falling yields. In general, yield was noted to decline 6bps from 8.32% in January 2016 to 8.26%. Short and medium-term yields fell respectively by 10bps and 8bps to 7.78% and 8.33%. By contrast, long-term yields climbed 5bps to 8.77%. The benchmark 10-year yield remained relatively stable at 8.26%. Graph JCI and Net Foreign Buys/Sells Graph Foreign Shareholding Non-resident investors continued to purchase tradeable government securities (SBN) despite lower yields. In January 2016, non-resident investors booked a net purchase of Rp9.44 trillion, reversing the net sell of Rp19.8 trillion the month earlier (Graph 2.33). Consequently, non-resident holdings on the SBN market expanded from 37.30% to 37.95% in February 2016 (Graph 2.34). 17

19 Graph Tradable Government Securities Yield and Net Foreign Buys/Sells Graph Changes in Foreign Holdings of Tradable Government Securities (SBN) Nonbank Financing Nonbank economic financing was observed to increase during Total financing through initial public offerings (IPO), rights issues, corporate bonds, medium-term notes (MTN), promissory notes and other financial instruments totalled Rp136.0 trillion, up from Rp111.1 trillion in Financing to the financial sector increased Rp8.1 trillion, while financing to non-financial sectors increased Rp16.5 trillion. Consequently, the market share of the financial sector, in terms of nonbank financing, declined in 2015, primarily due to fewer share issuances (IPO and rights issues) (Table 2.6). Table 2.6. Nonbank Financing 18

20 3 MONETERY POLICY RESPONSE The BI Board of Governors agreed on 16-17th March 2016 to lower the BI Rate 25 basis points (bps) to 6.75%, with the Deposit and Lending Facility rates at 4.75% and 7.25% respectively, effective 18th March The move is consistent with greater room to ease monetary policy along with a solid macroeconomic stability, specifically indicated by the persistently less intense inflationary pressures in 2016 and 2017, while uncertainties in the global financial market decreased. Amid a sluggish global economic growth, the lower BI Rate is expected to enhance domestic demand to bolster economic growth momentum, while maintaining macroeconomic stability. The Board of Governors will be cautious in determining future monetary easing, taking into account overall assessments and forecast of domestic macroeconomy and financial systems stability, as well as global economic developments. To enhance the effects of policy transmission, future focus on the short term are on strengthening operational framework through a consistent term structure of monetary operations. Furthermore, Bank Indonesia will also continue to strengthen coordination with the Government to control inflation, support growth stimuli and ensure structural reforms remain on track, thereby underpinning sustainable economic growth moving forward. 19

21 The Monetary Policy Review (MPR) is published monthly by Bank Indonesia after the Board of Governors Meeting each January, March, April, June, July, September, October and December. This report is intended as a medium for the Board of Governors of Bank Indonesia to present to the public the latest evaluation of monetary conditions, assessment, and forecast for the Indonesian economy, in adddition to the Bank Indonesia monetary policy response published quarterly in the Monetary Policy Report in April, July, October, and December. Specifically, the MPR presents an evaluation of the latest developments in inflation, the exchange rate, and monetary conditions during the reporting month and decisions concerning the monetary policy response adopteed by Bank Indonesia. For further information: Policy Regulation and Communication Division Monetary Policy Group Monetary and Economic Policy Department Telp: /5726 Fax: gkm_komunikasi@bi.go.id Website: http// The Board of Governors: Agus D.W. Martowardojo Governor Mirza Adityaswara Senior Deputy Governor Ronald Waas Deputy Governor Perry Warjiyo Deputy Governor Hendar Deputy Governor Erwin Rijanto Deputy Governor 20