MONETARY POLICY STATEMENT
The global economic slowdown has taken a more severe turn, reflected in forecasts of economic decline in developed countries beyond earlier predictions. Global financial markets remain in precarious condition with losses reported by growing numbers of world financial institutions. This has adversely impacted economies in the region, and particularly countries relying on exports to developed markets. Indonesia is no exception. At the same time, the global liquidity crunch persists, and is being followed by escalating perceptions of emerging market risks.
The slowing export performance is putting pressure on Indonesia's balance of payments, which nevertheless remains within safe limits. International reserves currently stand at 50.56 billion US dollars, still adequate for 5.4 months of imports and servicing of official external debt. These reserves will be reinforced by 3 billion US dollars in proceeds from the sale of Government global bonds.
The pressure on the domestic economy augurs for reduced economic growth in 2009. Bank Indonesia forecasts Indonesia’s economic growth in 2009 at about 4%. This growth may be biased downwards if the global economy takes a further turn for the worse. In 2009, the leading factor in faltering economic growth will be export performance, which depends to a great extent on global conditions. However, the main support for economic growth come from the domestic economy, with momentum boosted by a relaxed monetary policy, Government policies designed to improve public purchasing power and a range of fiscal stimuli to sustain momentum in key economic sectors.
The weakening in the global economy and prolonged period of low commodity prices on international markets has contributed to a downward trend in future inflation in Indonesia. On the domestic front, inflationary pressure is reined in by adequate supplies of staple goods and minimum pressure from administered prices. Inflation was remarkably subdued in February 2009 at 0.21% (mtm), well below the historical average. With these developments, the inflation forecast for 2009 is near the lower limit of the 5%-7% projected range.
On the other hand, the rupiah measured against the US dollar came under pressure during February 2009 as a whole. Fuelling this was negative sentiment over adverse developments in external factors, such as sharply reduced global economic growth and mounting losses announced by international financial institutions. Domestically, the relatively stable course of the economy and condition of fundamentals continued to bolster the currency. Responding to these developments, Bank Indonesia will stay the course with a range of stabilisation measures to safeguard the rupiah from excessive fluctuation.
Amid the steady deterioration in global economic conditions and weakening inflationary pressure, Bank Indonesia is maintaining a pro-growth focus. The various monetary policy actions pursued by Bank Indonesia are designed to revitalise the real sector in support of economic growth. These policies are being implemented alongside continued actions to maintain price and macroeconomic stability and financial system stability in the medium-term.
On 4 March 2009, the Board of Governors’ Meeting at Bank Indonesia decided to lower the BI Rate by 50 basis points from 8.25% to 7.75%, marking the fourth consecutive rate cut since December 2008. Bank Indonesia will maintain optimum use of all monetary policy instruments at its disposal to safeguard price and exchange rate stability in support of the economy. The relaxation in the monetary policy stance met with positive response from the interbank money market, which moves at about the level of the BI Rate. In January 2009, time deposit rates began to ease, tracking the movement in the BI Rate in keeping with improving perceptions of risk. This monetary policy is expected to encourage banks to lend to productive sectors, while maintaining a primary emphasis on prudence. Through these actions, the Indonesian economy will be able to weather the global crisis.
The Indonesian banking system remains in stable condition reflected in developments in a range of bank financial and soundness indicators. The condition of banking liquidity, including liquidity flows on the interbank money market, has begun to show improvement in comparison to recent months. Even so, Bank Indonesia is still closely monitoring an upward trend in credit risk that may potentially lead to mounting NPLs in the banking industry.
Looking forward, Bank Indonesia will maintain a steady course with pro-growth policies while maintaining emphasis on macroeconomic and financial system stability. If inflationary pressure stays on a downward trend, more room will be created for monetary policy relaxation. Supporting the monetary policy relaxation will be other measures for strengthening the financial sector, including a revamped system for bank supervision and an effective, efficient payment system. These actions are expected to foster business optimism, which in turn will promote economic growth.