I. MONETARY POLICY STATEMENT

In September 2009, the Indonesian economy moved forward in keeping with the ongoing recovery in the global economy. Further improvement took place in the economies of the United States and Japan. Europe, which even last month was marked by ongoing decline, has begun to chart positive growth.  The most significant economic gains are in China, where growth has been driven by a massive fiscal stimulus and increased bank lending. China's economic growth has resulted in positive impact marked by strengthening exports from countries in the region, including Indonesia. In response to these developments, economic growth in 2009 is expected to top earlier forecasts. Despite the improvement, concerns persist over continued high unemployment rates and risks to fiscal sustainability in the United States and Europe. 

The continuing global economic recovery has eased global financial market risks while bolstering market liquidity, which in turn has stimulated capital inflows. Optimism on global financial markets reflected in improving perceptions of risk has mitigated the liquidity crunch on money markets. In the global banking sector, risk perceptions continue to show a declining trend. The positive financial market gains in advanced nations have produced ripple effects on financial markets of Asia with capital inflows pouring into regional financial markets, including Indonesia. Stock indices are up in markets across the region. Regional currencies also registered gains from the effect of foreign capital inflows.

In Indonesia, the economy is showing stronger signs of recovery with third quarter growth likely to surpass the originally predicted 3.9%. On the consumption side, recent indicators point to the continued strength of private consumption expenditures. In similar developments, sales of retail and durable goods were up over the preceding month. Consumer confidence in the improvement in economic conditions is an added factor in the sustained upward consumption growth trend, bolstered by availability of bank financing. However, investment activity in Indonesia has seen no significant improvement, due to weak conditions in both domestic and external demand. Externally, the more robust economic performance of China and India has led to improvement in export activity. Exports thus have potential to exceed earlier growth forecasts. Reflecting these developments, economic growth in Q3/2009 could potentially climb slightly ahead of earlier forecasts.

Concerning prices, inflation was up during August 2009 in keeping with seasonal trends related to the Ramadan fasting activities, while core inflation maintained a downward trend. The flurry of activity during the fasting month has prompted increases in food stuff prices that has driven up volatile foods inflation in comparison to the preceding month. The ongoing downward trend in core inflation is bolstered by appreciation in the exchange rate, low imported inflation and declining public inflation expectations. Furthermore, administered prices inflation was minimal. Taken together, inflation in August 2009 reached 0.56% (mtm) or 2.75% (yoy). The annual rate of inflation is predicted to maintain a downward trend.

The improvement in the global and regional economy has had a positive impact on Indonesia's balance of payments. Conducive developments in the global economy, particularly in trading partner nations, have given added momentum to export performance. This export growth is expected to compensate for the rise in imports triggered by renewed activity in the domestic economy. In addition, more robust export performance during Q3/2009 is predicted in response to steadily rising international market prices. In the capital and financial account, foreign portfolio capital inflows remained strong, driven by conducive conditions on global financial markets and positive perceptions of the Indonesian economy. In response to these developments, international reserves in August 2009 reached 57.9 billion US dollars excluding the IMF allocation of Special Drawing Rights (SDRs), equivalent to 5.67 months of imports and servicing of official external debt.

Foreign capital inflows have strengthened the appreciation in the rupiah. Foreign capital continues to pour into the domestic market while adding to forex supply on the money market. Capital inflows in Indonesia are supported by optimism for global and domestic economic recovery, attractive yields on rupiah instruments and improving perceptions of risk. This has stimulated investor interest in domestic financial market assets. During August 2009, the average value of the rupiah appreciated 1.32% to Rp. 9,966 to the US dollar. The rupiah maintained stable movement during the month, reflected in volatility down from 0.6% in July 2009 to 0.46%. In the view of Bank Indonesia, the rupiah appreciation remains at a level supportive of the competitiveness of Indonesian exports in comparison to other Asian economies.

The domestic financial sector is marked by strengthening performance on domestic financial markets. Investor interest on the stock market has soared on the back of solid domestic economic fundamentals, with economic growth ahead of forecasts and positive developments reported by publicly listed companies for the first half of 2009. On the money market, interbank liquidity continues to ease, as reflected in the increased volume of money market transactions. Overnight money market rates came down from the preceding month in keeping with movement in the BI Rate. On the bond market, Indonesian government securities recorded increased yield, among others due to profit taking by some foreign investors who offloaded assets in the wake of rising yield in the preceding period and the appreciating trend in the exchange rate.

In the banking sector, monetary policy is being transmitted more effectively to financial markets.  The cumulative 300 bps cut in the BI Rate since December 2008 has been matched by steady decline in interest rates. In July 2009, the base lending rate fell by 108 bps, while rates for working capital credit and investment credit came down by 85 bps and 83 bps. In contrast, interest rates on consumption credit mounted by a further 53 bps. Improvement is also visible in bank loan disbursements. As of July 2009, bank lending maintained positive growth at 1.2% (ytd) with expansion at Rp 15.9 trillion.
With growing optimism for recovery in the economy, lending is predicted to keep rising as economic uncertainties in the real sector continue to fade. Commitments by a number of banks to lower deposit rates are expected to produce further reductions in bank lending rates while bolstering credit expansion. Bank Indonesia will monitor the fulfilment of these commitments and also take further measures to improve banking efficiency in order to promote further reductions in loan interest rates.
In monetary operations, Bank Indonesia launched 3-month tenor Repo transactions on Monday, 7 September 2009, to supplement the existing tenors and safeguard banking liquidity in anticipation of the strengthening outlook for bank lending.

At the micro level, conditions in the national banking system remain stable. Indicating this is the still comfortable level of the capital adequacy ratio (CAR) at 17.0% in July 2009. At the same time, the gross non-performing loans (NPLs) ratio is steady at below 5%. with the net NPLs ratio under 2%. Banking liquidity, including liquidity on the interbank money market, has shown further improvement alongside growth in depositor funds.

After factoring in these developments, the Bank Indonesia Board of Governors Meeting convened on 3 September 2009 decided to hold the BI Rate at 6.5%.  In the view of the Board of Governors, the monetary relaxation since December 2008 with BI Rate easing 300 bps to 6.50% offers ample support for the economic recovery and bank intermediation processes. At 6.50%, the BI Rate level is also regarded consistent with achievement of the 2010 inflation target set at 5% ± 1%.