I. MONETARY POLICY STATEMENT

As 2009 drew to a close, various economic indicators pointed to ongoing improvement in macroeconomic conditions in Indonesia. Supporting this was rising optimism for domestic and global growth and prudently managed domestic macroeconomic stability. Growth in 2009 reached an estimated 4.3% with inflation at 2.78%, a balance of payments surplus and exchange rate appreciation measured point-to-point at 15.65% over the preceding year. Within the context of the global crisis, these positive achievements were closely tied to resilient domestic demand, a sound and stable banking system, mounting optimism in expectations for global economic recovery and the accommodative fiscal and monetary policy response that has shored up the domestic economy. 

The overall condition of the global economy and financial markets has followed a positive trend. In developed countries, the economic recovery process is moving forward. This is borne out in the strengthening performance in consumption and production and turnaround in the labour market. Labour market conditions in the US and Japan are improving in line with expanding consumption and production. The economies of Asia, which are gaining importance as engines of global economic recovery, are also charting more robust growth. In a similar vein, performance on global financial markets is on the rise. Although investor confidence was shaken during the Dubai World debt crisis and Greek fiscal crisis, impact was short-lived with comparatively little knock-on effect on world financial markets. In preliminary figures, global inflation resumed upward movement in response to the ongoing recovery in the world economy, while remaining below inflation levels reached in 2008. This turnaround has enabled some advanced economies to maintain an accommodative monetary policy stance. Most central banks in advanced nations, such as the USA, UK and Japan, kept their rates on hold during December in an effort to boost economic recovery.

At home, the improvement in the global economy has strengthened exports and investment. Following a steep decline in the first half of 2009, exports began recovering mid-year in keeping with the progressive improvement in global economic recovery and mounting commodity prices. Estimates show that export-oriented sectors such as manufacturing performed more strongly in Q4/2009 in response to rising external demand.  At home, household consumption has maintained brisk growth, bolstered by stable public purchasing power and sustained levels of consumer confidence. The resurgence in exports and sustained high levels of consumption have strengthened business optimism for investment, particularly since mid-2009. The investment growth projection for Q4/2009 is upbeat, reflected among others in increased cement consumption and renewed growth in capital goods imports. After factoring these improvements in economic conditions, the annual rate of economic growth for Q4/2009 in preliminary figures is 4.4%. Economic growth for 2009 as a whole is estimated at 4.3%. 

Domestic economic resilience has been coupled with reductions in inflationary pressure. December inflation reached only 0.33% (mtm), well below the historical average.  Measured annually, CPI inflation in 2009 came to 2.78% (yoy) while core inflation was recorded at 4.28% (yoy). The low inflation outcome is closely linked to external demand and a series of policy actions instituted by the government. The steep global economic contraction sent world commodity prices tumbling in 2009, a development that also slowed activity in the domestic economy. Besides the influence of external developments, low inflation was also attributable to the appreciating trend in the rupiah during 2009. Brisk capital inflows on domestic financial markets helped to boost the value of the rupiah, with the effect most noticeable after the end of Q1/2009. In added developments, the subdued inflation in 2009 was closely linked to a series of government policy actions. Falling prices for crude oil and other international commodities afforded the government additional room for a renewed cut in subsidised fuel prices early in the year. At the same time, government efforts to safeguard the supply and distribution of food commodities, led by rice, resulted in significantly low volatile foods inflation compared to historical levels. In response to these developments, inflation came below the 2009 inflation target set at 4.5%±1%.

The balance of payments posted a surplus, contributing to the appreciation in the rupiah.  During 2009, the surplus in Indonesia's balance of payments boosted international reserves to USD66.1 billion, equivalent to 6.6 months of imports and servicing of official external debt. The balance of payments surplus is explained primarily by the significant drop in imports in line with the reduced demand from export-oriented industry for imported raw materials and also lower imports of consumer goods. While exports recorded negative growth, performance was still ahead of imports. Driving this was the growing demand for resource-based commodities from the emerging markets of Asia, which have mounted a more rapid recovery.  Added support for the balance of payments surplus came from heavy capital inflows stimulated by the improvement in the macroeconomic outlook, high yields on rupiah placements and strengthening international confidence in the domestic corporate sector. Bolstered by the balance of payments, the rupiah exchange rate maintained an upward trend from the end of Q1/2009.  Point to point, the rupiah appreciated 15.65% over end-2008 to Rp 9,425 to the USD. 

In the financial sector, stability was maintained in the banking system. However, lending rates did not ease as expected. Bank deposit rates, on the other hand, maintained their downward movement. Even so, monetary policy transmission through the interest rate channel was reflected in the still limited reduction in loan interest rates. In response to the lack of significant cuts in loan interest rates, slow take up in economic activity and persistently strong perceptions of risk held by the banking system, bank lending saw only modest expansion from January to November 2009 at 5.7% (ytd). In the asset price channel, the loose bias policy stance met with favourable response on the stock market and government securities market. The stock index soared on the back of heavy capital inflows and positive developments on the global financial market. On the bond market, government securities yield narrowed in keeping with optimism for world economic recovery and improving global perceptions of risk in Indonesia, in addition to the comfortable levels of inflation and fiscal sustainability. On the micro level, national banking system remains in stable condition,  as indicated by the robust capital adequacy ratio (CAR) at 17% in November 2009. At the same time, the gross non-performing loans (NPLs) ratio was kept to 4.4% with net NPLs at 1.4%. Banking liquidity, including liquidity on the interbank money market, has shown further improvement alongside growth in depositor funds.

Looking forward, the outlook is for further improvement in the Indonesian economy, although various risks and uncertainties call for vigilance.  Bank Indonesia forecasts economic growth to reach 5.0%-5.5% in 2010 while inflation is targeted in the range of 5±1%. Actions to boost economic growth momentum while maintaining low inflation remain daunted by various micro and structural challenges in the economy, such as weak manufacturing competitiveness, oligopolistic tendencies in market structures for food commodities and various problems related to locations of centres for production, distribution and trade.  The challenges posed by the lack of optimum monetary policy transmission through the credit channel are a priority area calling for immediate resolution.

In view of these problems and challenges, the Bank Indonesia monetary policy for achieving the 5±1% inflation target in 2010 will be backed by a series of policy actions. In operational terms, policy will focus on strengthening the effectiveness of monetary policy transmission, managing excess banking liquidity and curbing exchange rate volatility in order to manage public expectations of inflation.  At the structural level, stronger coordination is envisaged with the Government to mitigate structural impact from inflation caused by problems with distribution, trading systems and market structures for staple commodities. The effectiveness of the Inflation Control Team, an interministerial body responsible for inflation control, will be enhanced at the central government and regional levels.
On 6 January 2010, the Bank Indonesia Board of Governors Meeting decided to hold the BI Rate at 6.5%. Like before, the interest rate corridor is set at about +/-50 bps of the BI Rate, with the repo rate at 7% and the short-term deposit facility (FASBI) at 6%. In the key decisions underlying this decision, the BI Rate level remains consistent with the 5% ±1% inflation target for 2010 and the present monetary policy stance is also regarded conducive to the economic recovery process and the operation of the bank intermediation function.