BI Rate Outlook September 2014

Remain Unchanged Amid the Easing Inflation and Returning Trade Balance Surplus

       Global economy seen a recovery, but uneven and not yet powerful. This is indicated by the improving economies of China and the US. China's economy recorded improving growth to 7.5% y-o-y in 2Q 2014 from 7.4% y-o-y in 1Q 2014 due to government spending. Nevertheless, China's economy still seen an improvement in 3Q 2014. This is indicated by increased exports, improved Purchasing Managers Index (PMI), and rising industrial production index. Furthermore, the US economy posted improving growth to 2.5% y-o-y in 2Q 2014 from 1.9% y-o-y in 1Q 2014 which was largely due to growing personal consumption expenditure, private investment and increasing exports. Inflation was relatively stable at 2.0% y-o-y in July 2014 and the same with threshold of 2.00% set at FOMC Projection in 2014. US unemployment rate in August’14 shows slightly decrease to 6.1% from 6.2% in the previous month. Furthermore, the US economic growth has not been strong enough and not suitable repair US unemployment rate to make the Fed was not in a hurry to raise interest rates this year. Meanwhile, European's economy recorded slowing growth to 0.7% y-o-y in 2Q 2014 from 0.9% y-o-y in 1Q 2014 due to slowing of consumption and exports, The European Central Bank cut again their policy rate at 0.05% in September 2014 to support the economic growth and to fight the threat of deflation. ECB also revised down euro economy growth expectation from 1% to 0.9% in this year. Furthermore, Japan's economy also recorded contraction -0.1%% y-o-y in 2Q 2014 from 3.0% y-o-y in 1Q 2014 due to consumer spending dropped after sales tax increase.

       On the Indonesia’s economy front, domestic economic growth is expected to continue to be moderate in 3Q 2014. We expect economic growth in Indonesia in 3Q 2014 better than the previous quarter. Both private and government consumption is still growing quite well. Private consumption is supported by the increase in expenditure due to Ramadan and Eid celebrations. Furthermore, an increase in government consumption is supported by realize 13th salary disbursements to its ministries and institutions. Moreover, export performance is expected to improve concurrently with the decrease in the tariff duty raw minerals and improving economies of Indonesia's main trading partners. Therefore, we expect the Indonesian economy will grow 5.26% y-o-y in 3Q 2014, improve compare with 5.12% in 2Q 2014. Overall, we expect the Indonesian economy is only growing at about 5.20% in 2014, slowing from 5.78% in 2013.

       Furthermore, Indonesia’s trade balance in July 2014 returned surplus of USD 124 mn compared with a deficit of USD 288 mn in one month earlier. Exports in July stood at USD 14,178 mn, fell by 7.99% m-o-m. The total imports reached USD 14,054 mn, fell by 10.47% m-o-m from USD 15,698 mn. The Indonesian trade fell in July due to seasonal factors, namely the existence of a long holiday Eid celebration. As in previous years, every long holiday Eid makes the activity of loading and unloading of goods at the port decreased, consequently the performance of trade also fell. Furthermore, the decline in imports is also due to the slowdown in the domestic economy. The returning of trade surplus in July is expected to make the current account deficit (CAD) improved from -4.27% per GDP in Q2 2014 to -3.80% per GDP in Q3 2014. Nevertheless, overall we expect the current account deficit of -3.20% per GDP in 2014 which is one of the causes of Rupiah still under pressure.

       Inflation in August 2014 drags down to 0.47% m-o-m from 0.93% m-o-m in previous month. Furthermore, yearly inflation falls to 3.99% y-o-y from 4.53% y-o-y in the previous month. The decline in yearly inflation is caused by the decrease (back to normal) transport rates and relatively stable prices of foodstuffs. Going forward, inflationary pressure is expected to reach 5.12% y-o-y in end of this year.

       Rupiah depreciated by 1.1% against USD in August’14 as improving US economic data and the geopolitical crisis in Ukraine, Palestine, and Iraq that have an impact on the strengthening USD. Furthermore, foreign outflows also occurred on Indonesia stock market. Foreigners booked net-sell of USD 112.4 million in August 2014. In the other hand, from latest data showed foreigner booked net buy in bond market during the month of August by adding up IDR 22.17 trillion. Later, Indonesia's foreign reserves in August 2014 reached US$ 111.22 billion increase from US$ 110.54 billion in July 2014.

       Furthermore, Indonesia’s money supply (M2) in Jul’14 posted slower growth to 11.0% y-o-y from 13.1% y-o-y in Jun’14 Based on the components, slowing growth of M2 is derived from the components of M1 and Quasi Money, each of which grew 4.4% y-o-y and 13.3% y-o-y, down from June 2014 (10.2% y-o-y and 14.0 % y-o-y respectively). Based on the factors that influence, M2 growth slowdown is mainly affected bank credit grew only 15.0% y-o-y in July 2014, slowing from 16.6% y-o-y in June 2014 in line with the moderation in domestic demand.

       Based on the factors mentioned above, in this month Bank Indonesia is expected to maintain its monetary policy in the same tone as in the last month. We expect the BI rate would remain unchanged at 7.50%, the deposit facility rate at 5.75% and the lending facility rate at 7.50% on the Board of Governors Meeting September 11^th, 2014.