MONETARY POLICY STATEMENT
The Indonesian economy showed further improvement in October 2009 alongside the ongoing recovery in the global economy. The most conspicuous progress is visible in Asia, where the Chinese economy is forging ahead as the engine of growth for the region. Bolstered by the China factor, Asia’s economic growth is outpacing that of other regions. In advanced industrial nations, recovery is making headway with support from government-sponsored fiscal stimulus packages. However, the economic recovery process in developed economies and especially the United States remains daunted by risks such as high unemployment and slow improvement in income levels.
Positive developments continue on global financial markets in line with the ongoing economic recovery and stable perceptions among money market actors. Global stock market indices have climbed further while perceptions of risks in financial market assets in developed nations and emerging markets have improved, as reflected in comparatively stable figures for credit default swaps (CDS). The liquidity crunch that has beset global money markets is also easing. The present global economic recovery in tandem with rising commodity prices on world markets and the associated potential for escalating inflationary pressure has prompted some central banks to hold off cuts in their policy rates. In Asia’s emerging markets, the more rapid recovery is expected to prompt changes in monetary policy stance in anticipation of mounting inflationary pressure.However, in developed economies, the accommodative monetary policy stance is predicted to continue until next year, given the current high rates of unemployment and lack of strong progress in economic recovery. In view of these developments, capital inflows are predicted to keep pouring into emerging markets.
At home, the various developments in the global economy have provided a boost to Indonesia’s economic performance. In the external sector, improving conditions in regional economies and the share of global trade dominated by raw materials and intra-industry trade within Asia have contributed to more robust export performance in Indonesia. Domestically, brisk growth in private consumption in response to improving public optimism and subdued inflation is the main factor sustaining Indonesia’s economic growth. Investment is predicted to chart increased growth over the preceding period, bolstered by government capital expenditures and optimism for strengthened demand reflected in rising cement consumption and initial recovery in capital goods imports. Overall, the Indonesian economy is predicted to chart higher growth in Q4/2009 compared to one quarter earlier.
Concerning prices, inflation eased further in October 2009 while staying below the historical trend. Key to the low October inflation was the appreciation in the rupiah and declining public expectations of inflation, with core inflation sinking further to an unprecedented low. In response to these developments, inflation in 2009 is forecasted at the lower end of the 4.5%±1% (yoy) inflation targeting range. Looking forward, inflation in 2010 is predicted to return to normal at 5±1% in keeping with renewed vigour in domestic economic activity and resurgent commodity prices.
The ongoing improvement in exports and capital inflows augurs for strengthened performance in Indonesia’s Q4/2009 balance of payments, again projected to chart a surplus. The gathering momentum in the global economy will provide an added boost to the current account. The capital and financial account also charted an estimated surplus on the back of steady inflows of foreign portfolio capital spurred by growing risk appetite for emerging market assets and sentiment over the weakening of the US dollar. External financing has also mounted on improving expectations for the domestic economy and the upturn in global economic conditions. In response to these developments,the international reserves position at end-October 2009 widened to 64.5 billion US dollars. This improvement in external sector fundamentals contributed to the appreciation in the rupiah during October 2009.
In the domestic financial sector, financial markets reported overall gains. Recovery of investor confidence has paved the way for renewed capital inflows, despite short-lived correction at the end of the month. The bond market has seen foreigners take up larger positions in response to modest increase in short-term and medium-term yields. On the stock market, the index surged past the 2,500 mark before sustaining correction from profit taking and fallout from global market turbulence. Money market conditions were marked by ample bank liquidity alongside reduced market segmentation. Monetary policy transmission carried forward in the financial sector as reflected in the ongoing decline in deposit and lending rates, despite the absence of change in the BI Rate since September 2009. Domestically oriented lending such as consumption credit recorded brisk growth, but export-oriented sectors saw very limited credit expansion. Looking forward, further improvement is predicted in monetary policy transmission in keeping with the more positive perceptions of the economy among actors in the real sector and banking system and bank commitments to lower interest rates.
Conditions in the banking system also reflect ongoing stability at the micro level. Indicating this is the still comfortable level of the capital adequacy ratio (CAR) at 17.7% in September 2009. At the same time, the gross non-performing loans (NPLs) ratio held within safe limits below 4.3% with the net NPLs ratio at less than 1.3 %. Banking liquidity, including liquidity on the interbank money market, has shown further improvement alongside growth in depositor funds.
On 4 November 2009, the Bank Indonesia Board of Governors Meeting decided to hold the BI Rate at 6.5%. The key considerations in this decision are that the 6.5% rate is consistent with the 5% ± 1% inflation target for 2010 and the present monetary policy stance is also regarded as conducive to economic recovery process and banking intermediation.