Bank Indonesia

05/25/2021 | News release | Distributed by Public on 05/25/2021 08:28

BI 7-Day Reverse Repo Rate Held At 3.50%, Synergy Maintaining Stability, Accelerating Recovery

No.23/ 129 /DKom

The BI Board of Governors Meeting agreed on 24th and 25th May 2021 to hold the BI 7-Day Reverse Repo Rate at 3.50%, while also maintaining the Deposit Facility (DF) rates at 2.75% and Lending Facility (LF) rates at 4.25%. The decision is consistent with projected low inflation and efforts to maintain rupiah exchange rate stability, while accelerating the national economic recovery. Bank Indonesia continues to optimise the accommodative monetary and macroprudential policy mix, while accelerating payment system digitalisation in Indonesia to strengthen the national economic recovery through the following policy measures:

1. Maintaining rupiah exchange rate policy to maintain stability in line with the currency's fundamental value and market mechanisms.

2. Maintaining the strengthening strategy for monetary operations to reinforce the effectiveness of the accommodative monetary policy stance.

3. Maintaining Prime Lending Rate (PLR) transparency in the banking industry with an emphasis on PLR components, including the cost of funds, overhead costs and profit margin, and addressing the interest-rate rigidity affecting new loans (Appendix).

4. Strengthening the accommodative macroprudential policy stance by refining the MSME credit ratio into the Macroprudential Inclusive Financing Ratio (RPIM) by expanding the scope of bank partners to disburse inclusive financing as well as through inclusive financing securitisation and other business models, amongst others.

5. Lowering the upper limit on credit card interest rates from 2% to 1.75% per month to support interest rate policy transmission and cashless transaction efficiency, effective from 1st July 2021.

6. Expanding money market deepening efforts by accelerating the establishment of a Central Counterparty (CCP) as well as standardising repo transactions for clearing via the CCP.

7. Promoting trade and investment as well as continuing to socialise the use of local currency settlement (LCS) in conjunction with other relevant institutions. In May and June 2021, Bank Indonesia will promote trade and investment in Singapore, China, Japan, United States, Mexico, UK, Sweden, Norway and France.

Bank Indonesia constantly strengthens policy synergy with the Government and Financial System Stability Committee (KSSK), including implementation of the Integrated Policy Package to accelerate the national economic recovery. Bank Indonesia is also strengthening coordination with the Government and other relevant authorities to expedite lower lending rates in the banking industry and stimulate loans/financing disbursed to businesses and priority sectors.

The global economic recovery is proceeding as previously expected despite persistently elevated global financial market uncertainty. First-quarter economic growth in the United States and China exceeded previous projections. The US economy gained momentum on the back of growing domestic demand, ongoing monetary and fiscal stimuli, as well as improving manufacturing and services sector performance. China's economy continues to gain traction, underpinned by consumption and investment. Notwithstanding, global economic recovery divergence is becoming more apparent as growth in developing economies lags advanced economies. India's economy is predicted to grow more slowly than previous forecasts due to the recent Covid-19 spike. Various early indicators in April 2021 confirmed ongoing global economic improvements, such as the Purchasing Managers Index (PMI), consumer confidence and retail sales, which increased in several countries. World trade volume and international commodity prices are also rising and, thus, support export performance in developing economies, including Indonesia. Global financial market uncertainty has begun to subside in line with the transparent and consistent communication strategy of the US Federal Reserve concerning the accommodative policy direction, which is nevertheless overshadowed by rising US inflation beyond market expectations as well as volatile US Treasury Bond (UST) yields. Such developments have drawn global capital inflows to a number of developing economies, leading to local currency appreciation, including in Indonesia.

Domestic economic growth continued to improve in the second quarter of 2021 in line with forecasts. The national economy recorded a shallower -0.74% (yoy) contraction in the first quarter of 2021 compared with -2.19% (yoy) in the fourth quarter of 2020. The domestic gains were primarily driven by export performance on the back of growing demand in China and the United States, coupled with the realisation of fiscal expenditure (procurement, capital expenditure and social assistance disbursements) as well as non-building investment. Meanwhile, public mobility restrictions to break the domestic chain of Covid-19 transmission in several regions continued to undermine the household consumption recovery. Spatially, all regions of Indonesia have recorded stronger economic performance, with Sulampua (Sulawesi-Maluku-Papua) maintaining growth in positive territory. Various early indicators point to the economic gains persisting in the second quarter of 2021, as reflected in higher consumer expectations, retail sales, manufacturing PMI and export-import realisation. On the demand side, economic gains are driven by increasing exports and non-building investment. By sector, improvements have been recorded in terms of Manufacturing, Trade and Construction. Consequently, economic growth in 2021 remains in line with Bank Indonesia's projection published in April 2021, namely 4.1-5.1%.

Improvements recorded in Indonesia's Balance of Payments (BOP) have helped to bolster external sector resilience. The BOP recorded a USD4.1 billion surplus in the first quarter of 2021, influenced by a narrow current account deficit as well as capital and financial account surplus. The current account recorded a manageable USD1.0 billion deficit (0.4% of GDP), impacted by higher imports to fuel the domestic economic recovery amidst stronger export performance. Exports of nearly all major commodities are tracking upward trends, led by crude palm oil (CPO), coal as well as iron and steel. A net inflow of portfolio investment totalling USD4.9 billion boosted the capital and financial account. Positive BOP performance persisted in April 2021 with a trade surplus of USD2.2 billion and another net inflow of portfolio investment totalling USD0.9 billion in April and May 2021 (as of 21st May) as global financial market uncertainty began to subside. The position of reserve assets in April 2021 stood at USD138.8 billion, equivalent to 10.0 months of imports or 9.6 months of imports and servicing government external debt, which is well above the 3-month international adequacy standard. Therefore, Bank Indonesia projects a low and manageable current account deficit for 2021 in the 1.0-2.0% of GDP range. Moving forward, various efforts to strengthen external stability will be pursued, including initiatives to improve the investment climate in line with implementation of the Job Creation Act, along with the maintained attractiveness of domestic financial assets for investment.

Rupiah exchange rates remain stable supported by Bank Indonesia's stabilisation measures. As of 24th May 2021, the rupiah strengthened 0.63% (ptp) or by 1.42% on the average April 2021 level, thus the extending the 0.55% (ptp) gain recorded one month earlier. The rupiah continues to regain lost value as foreign capital inflows return to domestic financial markets despite recent pressures caused by UST yield fluctuations. Therefore, the rupiah has depreciated by just 2.12% (ytd), as of 24th May 2021, on the level recorded at the end of 2020, which is comparatively lower than currencies in other peer countries, such as Turkey, Brazil and Thailand. Moving forward, Bank Indonesia will continue to strengthen exchange rate stabilisation policy in line with the rupiah's fundamental value and market mechanisms through effective monetary operations and adequate market liquidity.

Inflation remains low in line with adequate supply despite a seasonal spike in demand during Ramadan. In April 2021, the Consumer Price Index (CPI), as a measure of headline inflation, stood at 0.13% (mtm), bringing inflation for the calendar year to 0.58% (ytd). Annually, the CPI remains low at just 1.42% (yoy), albeit up from 1.37% (yoy) one month earlier. Recent inflation developments have been influenced by stable core inflation amidst growing domestic demand, maintained exchange rate stability and policy consistency by Bank Indonesia to anchor inflation expectations to the target corridor. Volatile food inflation remains under control due to adequate supply during the harvesting season, which offset growing seasonal demand during Ramadan. Meanwhile, inflationary pressures on administered prices are mild despite higher excise duties on tobacco feeding through to higher filtered clove cigarette prices, and a build-up of inflationary pressures on household fuels. Moving forward, Bank Indonesia remains firmly committed to maintaining price stability and strengthening policy coordination with the central and regional governments through national and regional inflation control teams (TPI and TPID) to control headline inflation within the predetermined target range, namely 3.0%±1% in 2021.

Liquidity conditions remain loose in line with Bank Indonesia's accommodative monetary policy stance and the impact of synergy between Bank Indonesia and the Government to expedite the economic recovery. Bank Indonesia has injected liquidity through quantitative easing to the banking industry totalling Rp88.91 trillion in 2021 (as of 21st May 2021). Furthermore, Bank Indonesia continues to purchase SBN in the primary market as part of policy synergy between Bank Indonesia and the Government to fund the 2021 State Revenue and Expenditure Budget (APBN). As of 21st May 2021, Bank Indonesia has purchased SBN in the primary market totalling Rp108.43 trillion, consisting of Rp32.97 trillion through primary auction and Rp75.46 trillion through greenshoe options (GSO). Such policy supports loose economic liquidity conditions, as reflected by narrow (M1) and broad (M2) money supply, which grew 17.4% (yoy) and 11.5% (yoy) in April 2021. By component, M2 growth was driven by Currency Outside Banks (COB), rupiah demand deposits and quasi-money as demand spiked during the approach to Eid-ul-Fitr. M2 growth was influenced by the Government's expansive fiscal operations as a corollary of policy synergy with Bank Indonesia as well as other government receipts and an increase of Net Foreign Assets (NFA), despite the ongoing credit contraction. Consequently, excess liquidity conditions persist in the banking industry, as reflected by a high ratio of liquid assets to deposits at 33.67% and deposit growth at 10.94% (yoy).

A low policy rate and excess liquidity in the banking industry have precipitated lower lending rates despite ongoing rigidity. In the markets, the overnight interbank rate and bank deposit rate fell by 155 bps and 196 bps respectively to 2.79% and 3.76% in March 2021. Overall, the banking industry lowered prime lending rates by an average of 174bps (yoy) to 8.9% in March 2021, led by state-owned banks that reduced the PLR by 270bps (yoy) in March 2021, contrasting more limited reductions by other bank groups. Notwithstanding, the lower prime lending rate has not been accompanied by a commensurate reduction of interest rates on new loans at just 59 bps (yoy) over the same period. By bank group, regional government banks, national private commercial banks and state-owned banks reduced lending rates on new loans by just 34bps (yoy), 52bps (yoy) and 55bps (yoy) respectively, contrasting the significant 158bps (yoy) reduction offered by foreign bank branches. Consequently, interest rates on new loans are highest at regional government banks and national private commercial banks at 10.05% and 9.32% respectively compared with other bank groups. Meanwhile, the interest rates on new loans offered by state-owned banks and foreign bank branches stand at 8.70% and 5.34% respectively.

Financial system resilience is still solid despite further opportunities to stimulate the bank intermediation function. The Capital Adequacy Ratio (CAR) in the banking industry was high in March 2021 at 24.05%, accompanied by persistently low NPL ratios of 3.17% (gross) and 1.02% (nett). Despite loose liquidity conditions, the bank intermediation function recorded a 2.28% (yoy) contraction in April 2021 on compressed demand for new loans in the corporate sector and relatively high-risk perception in the banking industry. Credit in the banking industry is expected to increase commencing in the second quarter of 2021 in line with stronger economic growth, improving corporate performance and less stringent lending standards in the banking industry. In 2021, growth of outstanding loans disbursed by the banking industry is projected at 5-7%. In this regard, Bank Indonesia will continue to strengthen PLR transparency in the banking industry, while coordinating with the Government and other relevant authorities to stimulate lending to the corporate sector and other priority sectors, including SMEs.

Bank Indonesia will continue to orient payment system policy towards expediting digitalisation and accelerating digital economic and financial transactions. Growth of digital economic and financial transactions is accelerating in line with greater public acceptance and growing public preference towards online shopping, as well as the expansion of digital payments and digital banking. Therefore, the value of electronic money transactions in April 2021 stood at Rp22.8 trillion, growing 30.17% (yoy). Similarly, the volume and value of digital banking transactions also increased rapidly by 60.27% (yoy) and 46.36% (yoy) in April 2021 to reach 572.8 million transactions and Rp3,114.1 trillion respectively. Bank Indonesia will continue to accelerate inclusive and efficient economic and financial digitalisation by accelerating the expansion of QRIS merchants through a targeted ecosystem approach, while expanding QRIS public education and socialisation activities. Furthermore, Bank Indonesia will expand the electronification of social aid program (bansos) disbursements and regional government financial transactions, while supporting the National BBI Movement promoting pride in Indonesian-made products. Meanwhile, currency in circulation grew 13.42% (yoy) to reach Rp843.4 trillion in April 2021 in line with growing seasonal demand during the approach to Eid-ul-Fitr 1442 H. The value of card-based payment transactions using ATM/debit cards and credit cards stood at Rp679.6 trillion in April 2021, growing 33.13% (yoy) in line with increasing economic activity and public demand during Ramadan and Eid-ul-Fitr 1442 H.

Jakarta, 25th May 2021

Head of Communication Department

Erwin Haryono

Executive Director

Information about Bank Indonesia

Tel. 021-131, Email: [email protected]