Bank Indonesia continues to monitor various global and domestic risks. Globally, there are indications of a more promising economic outlook for advanced countries but several risks continue to demand vigilance, especially the current discourse on the Federal Reserve reducing its overall balance sheet along with geopolitical factors. At home, Bank Indonesia will monitor the impact of adjustments to administered prices (AP) on inflation as well as ongoing consolidation in the corporate and banking sector, which has undermined the impact of economic stimuli. Therefore, Bank Indonesia will constantly strive to strenghten its monetary, macroprudential and payment system policy mix to maintain macroeconomic and financial system stability. Furthermore, Bank Indonesia will continue coordinating with the Government to control inflationary pressures within the target corridor and accelerate structural reforms to support sustainable economic growth.
Economic growth momentum in Indonesia is expected to remain well in the first quarter of 2017, albeit below previous expectations. The main sources of the growth are stronger investment, solid consumption and positive export performance. First-quarter investment increased on building and non-building investment. Non-building investment improved on the back of commodity price hike, as reflected in the increase of heavy machineries sales for mining and farming. The hike in commodity prices also promoted export growth. Meanwhile, household consumption growth can potentially moderate slightly in the first quarter of 2017, indicated by slower growth of retail and automotive sales, as an effect of ongoing consolidation in the corporate sector. Economic growth is predicted to accelerate in the second quarter of 2017, supported by stronger investment and export performance, while consumption should remain relatively stable. Meanwhile, rising commodity prices and stronger demand due to the global economic recovery are expected to drive exports and investment. Looking forward, the role of fiscal stimuli, in terms of catalysing economic growth, should be maintained.
The rupiah continued to appreciate in March 2017, supported by macroeconomic stability and the positive perception of investors towards Indonesia’s promising economic outlook, coupled with easing global risks. Throughout the first quarter of 2017, the rupiah appreciated 1.09% (ytd) to close at Rp13,326/USD. Rupiah appreciation was driven by an influx of non-resident capital due to attractive domestic investment assets as well as sounder global factors. Foreign capital inflows were primarily drawn to stocks and government debt securities (SUN). Moving forward, Bank Indonesia will continue to stabilise rupiah exchange rates in line with the currency’s fundamental value, while maintaining market mechanisms.
The Consumer Price Index (CPI) recorded deflation in March 2017 as the supply of foodstuffs increased. CPI deflation was recorded at 0.02% (mom), contrasting inflation of 0.23% (mom) the month earlier. The main contributors were volatile foods after the harvests of several food crops boosted supply. Administered prices declined due to lower airfares, which reduced the impact of hikes to electricity rates. Moving forward, to maintain inflation within the target range of 4±1%, policy coordination between the Government and Bank Indonesia in inflation control requires constant strengthening, primarily in the face of adjustments to administered prices as part of the Government’s ongoing energy reforms, coupled with the expected seasonal spike of inflationary pressures during the approach to the holy fasting month.