I. MONETARY POLICY STATEMENT

Global economy continues to recover. Global economic recovery was mainly buoyed by expansion in emerging countries, like China. In addition, it is also backed by stronger domestic demand in developed countries, like the U.S. and Japan, although with a more moderate pace. Meanwhile, a recovery in Euro area run somewhat slower due to continued weakening consumption as a result of high unemployment level and worsening fiscal deficits in some countries. Based on those developments, the global economic growth for 2010 is revised up.

In the global financial markets, global economic recovery continues to support the performance of the global financial markets. Stock index was on an upward trend, although it was interrupted by negative sentiment came from signal of monetary policy tightening in China. Optimism in the global financial markets was also sustained by the improved risk perception in emerging markets. This has led to large capital inflows to emerging markets, which supports favorable financial markets condition and currency appreciation in some countries. Global inflation is estimated to remain relatively low, making the monetary authorities in most developed countries continue their accommodative monetary policy. With that, capital inflows to emerging countries, including Indonesia, is expected to persist.

The continued improvement in the global economy had a positive impact on the domestic economy. From the demand side, exports growth has showed more encouraging performance, in line with rising global demand. Likewise, household consumption remains strong, supported by better purchasing power and consumer confidence. The implementation of ASEAN-China Free Trade Agreement ACFTA is expected to bring positive impact for domestic economy both through exports and imports. Related to exports, Indonesia's competitiveness in the natural resource commodities will encourage exports. As for imports, ACFTA will support the availability of cheaper raw materials and capital goods, and will, in turn, improve production efficiency. Investment will also pick up, although only slightly. Investment mainly occurred in the construction sector, in the form of infrastructure. Other sectors that will also post strong growth are manufacturing and trade sectors, particularly related to higher consumption and exports, as well as transport and communications sector, along with higher economic activity. 

In terms of prices, inflation slightly picked up in January, 2010, but will remain within the target range of 5 ± 1% in 2010. Inflation in January 2010 was 0.84% (mtm), or 3.72 (yoy), higher than the previous month of 0.33% (mtm) or 2.78 (yoy). Inflation came mainly from volatile foods due to lower production of rice. This rice price hike was triggered by the decline related to seasonal factor and was also pushed by the increase in Government Purchasing Price of rice (HPP) by 10% as well as expectations on the rising Highest Retail Price (HET) of subsidized fertilizer in April 2010. Meanwhile, the pressure from fundamental factors, which are reflected in core inflation, was relatively stable. From the domestic side, supply was still sufficient to respond to increasing demand, which managed to keep price in check. Meanwhile, from external side, imported inflation in certain commodities surged, especially sugar. This was in line with rising international sugar prices. However, continued rupiah appreciation trend was able to tame inflation pressure from external factors.

Improved export performance coupled with capital flows continues to keep Indonesia's balance of payments in surplus. Favorable global economic condition, particularly in Indonesia’s trading partner countries, supports the improvement of exports performance. The increase in exports is expected to offset higher imports came from higher economic activity. In addition, rising international commodity prices will support growing optimism in the exports performance during the first quarter of 2010. That condition supports current account surplus. Performance in the Balance of Payment was also supported by surplus in the capital and financial account corresponding with strong capital flows. The main factor behind this surplus were stability in Indonesia’s economy, attractive yield in rupiah denominated assets, as well as Fitch rating upgrade further improved the attractiveness of rupiah assets. Issuance of government’s medium term notes in the global market amounted USD 2 billion had contributed to the capital and financial account surplus. With these developments, foreign exchange reserves at the end of January 2010 arrived at 69.6 billion U.S. dollars, sufficient to finance 5.9 months of imports and government foreign debt. Solid performance of Indonesia's balance of payments stimulated the strengthening of the rupiah. The rupiah on average gained 1.90% to Rp9.275 per U.S. dollar. At the end of the period rupiah arrived at Rp9.350 or gained 0.8% (ptp) from the year-end.

On the domestic financial sector, financial markets continued to show an encouraging picture in line with stability in domestic economy and improved global sentiment. In currency markets, increased banks liquidity is reflected in the declining risk in interbank money market as well as interest rate of O/N interbank money market which is maintained at around the BI Rate. In the stock market, JCI gained 3.02% (mtm). Better stock performance was corresponded with improving liquidity in the stock market. Stock rally was interrupted by negative sentiment characterized by global dynamics such as tightening in China, expectations of the banking activity restrictions, exit policy in the U.S, as well as fiscal sustainability in Greece. In the bond market, improving foreign debt rating of Indonesia to BB+ from BB has encouraged reduction in SUN yield nearly across all maturity spectrum. SUN yield dropped by 11 bps (mtm) on average.

Transmission of monetary policy in the financial sector also continued. This was reflected in declining deposit rates and lending rates amid unchanged BI rate since September 2009. Credit at the end of 2009 rose compared to the previous month. On a monthly basis, the increase of credit (including channeling) in December 2009 reached Rp39, 9 trillion, or posted 2.8% growth. Going forward, the transmission of monetary policy is expected to improve further in line with better perception on the economy and the commitment of banks to cut interest rates.

From the banking sector, national banking conditions remained stable. Banking stability is reflected in the maintained capital adequacy ratio (CAR) as of December of 17.4%. Meanwhile, the ratio of gross non-performing loans (NPLs) remain under control at 3.8%, with a net ratio of 0.9%. Banks liquidity, including liquidity in the interbank money market, and deposits growth continued to improve.
On 4 February 2009, the Board of Governors' Meeting at Bank Indonesia decided to keep the BI Rate unchanged at 6.5%. This decision was taken on the basis that the BI Rate at this level remains consistent with achievement of the 2010 inflation target, set at 5%±1%, and is supportive of measures to strengthen the economic recovery process, safeguard the financial stability and promote banking intermediation.