The global recovery has weakened further amid uncertainty in financial markets. Prospects across the main countries and regions remain uneven. IMF projected the global growth to slow to 3.1 percent in 2016 before recovering to 3.4 percent in 2017. Meanwhile, China's economy kept stable on modest growth at 6.7% y-o-y in 2Q 2016. Meanwhile, the China’s Purchasing Manager Index (PMI) manufacturing indicator maintained at 50.4 in September 2016, unchanged compare with the previous month. The China’s Industrial

Remain Unchanged

       The global recovery has weakened further amid uncertainty in financial markets. Prospects across the main countries and regions remain uneven. IMF projected the global growth to slow to 3.1 percent in 2016 before recovering to 3.4 percent in 2017. Meanwhile, China's economy kept stable on modest growth at 6.7% y-o-y in 2Q 2016. Meanwhile, the China’s Purchasing Manager Index (PMI) manufacturing indicator maintained at 50.4 in September 2016, unchanged compare with the previous month. The China’s Industrial Production Index was also maintaining growth at 6.0% (y-o-y) in August 2016, unchanged compare with one month earlier. The China’s exports growth fell by 10.0% y-o-y in September 2016. In the meantime, EU economy growth slowed to 1.6% y-o-y in 2Q 2016, compare 1.7% y-o-y in the previous quarter. European PMI Manufacturing indicator increased to 52.6 in September 2016 from 51.7 in one month earlier. European Industrial Production Index slowed growth to -0.6% y-o-y in July 2016 compare with 0.8% y-o-y in the previous month. Meanwhile, Japanese economy growth improved to 0.8% y-o-y in 2Q 2016, compare with 0.2% y-o-y in the previous quarter. In the other hand, Japanese PMI Manufacturing indicator increased from 49.5 in August 2016 to 50.4 in September 2016.  Japan industrial production index was improving growth to 1.2% y-o-y in August 2016 compare -0.9% y-o-y in July 2016.  Meanwhile, the US economy slowed growth to 1.3% y-o-y in 2Q 2016, compare 1.6% y-o-y in 1Q 2016. The US Purchasing Manager Index (PMI) increased to 51.5 in September 2016 compare 49.4 in one month earlier. The US industrial production index was slowing growth to contracted 1.1% y-o-y in August 2016 from contraction 0.5 % y-o-y in July 2016.

       On the domestic side, Indonesia’s economic growth accelerated from 4.91% y-o-y in 1Q16 to 5.18% y-o-y in 2Q16. It indicated that the Indonesian economy is still promising during recent global economic slowdown. The government’s strategy to give cash transfer in the form of 13^th and 14^th of salary payments to the public servant Moslem’s during fasting month in Jun-16 have successfully created multiplier effects for the national economy. Household spending grew 5.04% y-o-y in 2Q 2016, higher compare 4.94% y-o-y in previous quarter. Furthermore, government spending acceleration was also to contribute the recovery Indonesia’s economy in 2Q 2016. Government spending grew 6.28% y-o-y in 2Q 2016, higher than 2.94% y-o-y in 1Q 2016. Meanwhile, in line with slowing global economy, Indonesia’s trade performance was under pressure and still negative growth in 2Q 2016. Overall, Indonesia’s economic growth has reached 5.04% in 1H16. Looking ahead, we expect Indonesia’s economy will grow 5.09% in 2016.

       Indonesia's trade balance recorded a surplus US$ 1.22 billion in September 2016, increased from a surplus US$ 0.36 billion in August 2016. The widening of trade surplus is due to the decrease in imports faster than exports. The decrease in Indonesia's exports was caused by the return to normalcy in demand from the countries of Indonesia's major trading partners. Meanwhile, the decline in Indonesia's imports was caused by the return to normalcy in domestic demand after a spike in August 2016. Indonesia’s exports in September 2016 stood at USD 12,514.1 million fell by 1.8% m-o-m. On yearly basis, Indonesia’s exports slightly decreased by 0.6% y-o-y. On the other hand, the total imports in September 2016 reached to USD 11,297.2 million, fell by 8.8% m-o-m. On yearly basis, Indonesia’s imports decreased by 2.3% y-o-y. Meanwhile, Indonesia’s current account deficit recorded -2.02% per GDP in 2Q 2016, better from -2.19% per GDP in 1Q 2016. Current account deficit narrowed in 2Q 2016, mainly driven by the growing trade surplus. However, we expect Indonesia's current account deficit will be reached approximately -2.20% per GDP in 2016, widening from -2.05% per GDP in 2015. The widening current account deficit is caused due to domestic economic recovery leads to increased imports, at the same time export performance is still pressured by lower commodity prices and the weakening of global demand.

       Yearly inflation rose to 3.07% y-o-y in September 2016, compared with 2.79% y-o-y in the previous month. Meanwhile, consumer price index increased to 0.22% m-o-m from deflation 0.02% m-o-m in the preceding month. Furthermore, the monthly inflation in September 2016 mainly comes from higher prices of cigarette, car, tuition fee, electricity tariff, and mobile phone tariff. Looking ahead, we expect yearly inflation will reach around 3.15% by the end of this year.

       Rupiah strengthened 2.27% m-o-m to 12,998 in September 2016 due to the weakening USD and euphoria of tax amnesty program. Meanwhile, foreign outflows occurred on Indonesia stock market. Foreigners booked net-sell of USD 249.8 million in September 2016. On other side, from latest data showed foreigner booked net buy in bond market during the month of September 2016 by adding IDR 16.9 trillion. Furthermore, Indonesia's foreign reserves in September 2016 reached US$115.7 billion, increased from US$ 113.5 billion in the previous month was attributable to foreign exchange receipts, primarily from tax revenues and oil & gas export proceeds, withdrawal of government foreign loans, as well as auction of Bank Indonesia foreign exchange bills, which were more than the use of foreign exchange among other for repayments of government external debt and Bank Indonesia foreign exchange bills matured during period.

       Indonesia’s money supply (M2) growth in August 2016 slowed. M2 position in August 2016 stood at Rp 4,745.0 tn, or grew 7.7% y-o-y, lower than 8.2% y-o-y in the previous month. By component, a slowdown in M2 growth came from components of M1 and quasi money, each of which grew 10.6% y-o-y and 6.9% y-o-y lower than the previous month which recorded growth of 10.9% y-o-y and 7.5% y-o-y. On the other hand, the growth of securities other than shares increased to -9.9% y-o-y in August 2016 from -22.8% y-o-y in the previous month. Furthermore, bank loan grew 6.8% y-o-y in August 2016, lower from 7.7% y-o-y in July 2016. Meanwhile, the growth of third party funds slightly slowed to 5.8% y-o-y in August 2016 compare with 5.9% y-o-y in the previous month.

       Based on the factors mentioned above, in this month Bank Indonesia will hold the policy rate. Furthermore, we expect Bank Indonesia to give time for the effective transmission of monetary policy in the domestic financial markets after the interest rate cut last month. We expect the BI 7-day reverse repo rate remain unchanged at 5.00%, the deposit facility rate at 4.25%, and the lending facility rate at 5.75% on the Board of Governors Meeting October 19-20^th, 2016.