In the Board of Governors' Meeting convened on June 12, 2012, Bank Indonesia decided to hold the BI rate steady at 5.75%. The current policy rate is considered consistent with inflation forecast, which is expected to remain low and can be contained within its target range of 4.5%±1% in 2012 and 2013. To manage depreciation pressure triggered by worsening crisis in Euro area and negative sentiment in the global financial market, Bank Indonesia encourages more supply of foreign currency in the market, so that Rupiah movement is in tandem with the movement of other currencies in Asia and the fundamental of the Indonesia’s economy. In addition to maintain adequate liquidity, both in rupiah and foreign currency, Bank Indonesia also strengthen monetary operation and financial deepening, including the development of foreign currency monetary instrument.
Amid rising uncertainty in the global economy, Board of Governors views that the fundamental of Indonesia’s economy thus far, is well maintained. The prospect of global economy is still confronted with rising uncertainty and worsening crisis in Euro area, vulnerable US economic condition, and lower economic growth in China and India driven by crisis in Euro area. Under such circumstances, Indonesia’s economic growth in the Q2-2012 and for the whole year of 2012 is expected to arrive at 6.3 – 6.7%, although the risks are tilted toward the downside. The economic growth is mainly supported by domestic demand, with private consumption and investment are expected to remain strong. Source of growth from the external side is expected to decline, as exports growth is still affected by weak world demand and lower international commodity prices, while imports is expected to chart high growth due to strong domestic demand.
Relative to Q1-2012, Indonesia’s Balance of Payment is expected to improve in Q2-2012 and chart another surplus. Relatively high imports amid declining exports is expected to cause the current account remain in deficit, although lower than it was in the previous quarter. On the other side, amid pressure from capital outflow driven by global sentiment, relatively high surplus in the capital and financial account is expected to sufficiently cover the deficit in the current account. International reserves at the end of May 2012 reached USD111.5 billion, or equivalent to 6.2 months of imports and government’s external debt services. In term of imports, the international reserves is sufficient to cover 6.4 months of imports, much higher than the IMF threshold of 3 months.
Rupiah tends to weaken due to external factors. On point-to-point basis, Rupiah in May depreciated by 2.23% (mtm) to Rp9,400 per USD, or on average depreciated by 0.95% (mtm) to Rp9,254 per USD. Pressure on Rupiah was associated with high demand for foreign currency to finance imports, mainly imports of oil. Pressure on rupiah also came from foreign debt repayment and income transfer, amid higher foreign currency demand for portfolio rebalancing by non-resident, caused by global sentiment related to crisis in the Euro area. To maintain stability in the foreign exchange market, Bank Indonesia will continue to take necessary actions to manage adequate liquidity, supported by, among other, strengthened monetary operation through foreign currency monetary instrument development such as foreign currency term deposit, as well as strengthening coordination with the Government to mitigate the adverse impact of the risk of worsening global economy.
Inflation in May 2012 remained in check, with core inflation continued its downward trend. CPI inflation in May 2012 was 0.07% (mtm) or on an annual basis was recorded at 4.45% (yoy). The contained inflation was in line with the movement of core inflation, which remained low (4.14%, yoy), attributable to declining global commodity prices and contained domestic demand. In addition, deflation was seen in food prices, supported by adequate supply due to harvest season. Meanwhile, administered prices inflation was relatively low as there was no change in government policy on the prices of strategic commodities. Going forward, inflation is expected to remain contained and stay within its target range.
Financial system stability is well-maintained with improving intermediation function to support economic financing. Banking industry shows solid performance, as indicated by secured level of capital in which capital adequacy ratio (CAR) is well above minimum level of 8%, and gross non-performing loan (NPL) below 5%. Meanwhile, banking intermediary also continues to improve, reflected by credit growth in April 2012 that reached 25.7% (yoy). Investment credit recorded high growth, 28.8% (yoy), and is expected to increase economic capacity. Meanwhile, working capital credit and consumption credit grew by 27.7% (yoy) and 20.5% (yoy), respectively.
Going forward, Board of Governors will continue to focus on measures to stabilize rupiah and manage inflation expectation. In this regard, Bank Indonesia will continue to strengthen the existing monetary and macroprudential policy mix. BI rate policy response is continued to be directed to control fundamental inflationary pressure, in line with macroeconomic outlook. In addition, strengthened monetary operation and macroprudential policy, including maintaining adequate liquidity and promoting financial deepening, are aimed to stabilize Rupiah and manage inflation expectation. Coordination with government will be strengthened to maintain stability in the financial system through Financial System Stability Coordination Forum (FKSSK), as well as to contain inflation through national inflation control team (TPI) and regional inflation control team (TPID).
A complete report of the June 2012 Board of Governors’ Meeting, presenting macroeconomic developments and monetary policy will be published in the Monetary Policy Report (MPR) and accessible through Bank Indonesia’s website.