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Dec 16, 2016 11:45:14

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 15 Dec 2016. Moving forward, we expect the BI to slash its key policy rate by another 25bps in 2017 to support economic growth under stable IDR circumstances on:
1. Moderate inflation;

2. Manageable current account deficit;

However, IDR volatility could delay key policy rate cut.

¨ Similarly, deposit facility and lending rates were 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 easing would 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 boost consumption 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 was underpinned 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. (Rizki Fajar)

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