In the Board of Governors’ Meeting convened on 11 October 2011, Bank Indonesia decided to decrease BI Rate by 25 bps to become 6.50%. Bank Indonesia will make good efforts on exchange rate stabilization, especially from impacts of global financial market instability. The decision has been taken in line with confident that the inflation rate in 2011 and also in the year of 2012 will be below 5%. In addition, steps taken by Bank Indonesia will be directed as anticipation to mitigate the impacts of declining global economic and financial performance on Indonesian economic performance. In the near future, Board of Governors will closely monitor the global economic and financial situation and will consistently make adjustment on interest rate response and other monetary and macroprudential policy mix to mitigate the potential slowdown in the domestic economic performance without jeopardizing the priority to keep inflation within its target, that is, 5+1% in 2011 and 4.5%+1% in 2012.
Board of Governors continue to be vigilant on the high risk and uncertainty in global financial markets and a tendency of slowing down global economy due to debt and fiscal problems in Euro area and the US. The attention is primarily aimed at the short-term impacts through financial channel in the form of weakening capital market, increasing credit risk, and portfolio capital reversal pressure from emerging markets. Meanwhile, global economic performance is indicated to be weakening as reflected by slowing down in global production activities and retail sales coupled with weakening consumers’ confidence in advanced countries and the correction of some international commodity prices. On the other hand, inflationary pressures started to decline, although inflation in emerging markets remains relatively high, such that there is shifting in monetary policy response towards neutral or accommodative. Going forward, overall the Boards of Governors see the continuing slowdown of economic growth in the advanced countries, decelerating world trade volume and global commodity prices. Meanwhile, the large excess liquidity and investor risk perception in the global financial markets will continue to push the capital inflows to emerging economies, including Indonesia, in the forms of FDI as well as portfolio inflows.
Board of Governors view that Indonesian fundamental economic and banking will remain strong amidst increasing concern on the prospect of global economy. Economic growth in Q4/2011 is predicted to be higher, particularly supported by consumption and investment, and therefore the growth for overall 2011 is forecasted to reach 6.6%. So far, the impacts of global economic turmoil are mostly in financial markets, while the impacts on riel sectors have not been observed. Nevertheless, the weakening global economy is predicted to affect domestic economic performance in 2012, both through financial markets as well as international trade. Domestic economic growth in 2012 is forecasted to reach 6.5%. Domestic growth in 2012 is supported by strong consumption and increasing investment, while exports will face pressures. By production sector, the growth will be led by manufacturing sector; trade, hotels and restaurant sector; and transportation and communication sector.
Indonesia’s balance of payment in Q4/2011 is projected to regain surplus after experiencing a pressure due to capital outflows in the previous quarter. For overall 2011, Indonesia’s balance of payment is forecasted to continue charting considerable surplus. This surplus is predicted to continue in 2012, particularly supported by increasing surplus in capital and financial account from portfolio inflows as well as from FDI inflows. In line with that development, international reserves at the end of September 2011 reached USD 114.5 billion, or equivalent to 6.5 months of imports and external debt services of the Government. This amount of international reserves is predicted to be enough to support the stability of Rupiah exchange rate.
Rupiah exchange rate in Q3/2011 was under pressure, especially on September 2011. In Q3/2011, Rupiah depreciated by 2.42% (ptp) to Rp 8,790 per USD with higher volatility. Nevertheless, the depreciation of Rupiah is still in line with other countries’ exchange rates in the region. Pressure on Rupiah is mainly driven by global risks due to concern on the global economic prospect. In addition, larger demand for foreign exchange to finance imports also put pressures on Rupiah. Going forward, Bank Indonesia is determined to continue maintaining the stability of Rupiah exchange rate that is needed to secure macroeconomic stability.
Inflationary pressure tend to decrease. The CPI inflation in Q3/2011 is recorded at 1.89% (qtq) or 4.61% (yoy), lower than the inflation rate in the third quarter of the previous year. The decrease in inflation is driven by the subdued volatile food and administered prices inflation as supply improves, international food commodity prices decrease, and there is no Government policy on the prices of strategic commodities. Meanwhile, pressure on core inflation aside from increasing gold prices is also manageable due to exchange rate appreciation policy in the previous period and adequate supply in responding the demand. With such developments, inflation for overall 2011 is projected to be below 5%. On the year 2012, inflation is projected to remain under control and is projected to be under 5% in line with global commodity prices decrease and global economic weakening.
Banking system stability is under control with improvement in the banking intermediation despite financial market turmoil on the impact of global economic condition. The stable condition of banking industry is marked by secure level of capital and liquidity, with capital adequacy ratio (CAR) above the minimum level 8% and gross non-performing loans (NPLs) managed at comfortably safe level below 5%. Improvement in banking intermediation is also reflected in rising credit growth that reached 23.8% (yoy) in September 2011. Bank Indonesia continues to maintain banking system stability and boost the improvement of banking intermediation such that national economy can reach optimal growth amidst continuing global economic uncertainty.
A complete result of the October 2011 Board of Governors’ Meeting, presenting macroeconomic developments, monetary policy and the outlook for 2011-2012 will be published in the Monetary Policy Report (MPR).
Jakarta, 11 October 2011
Public Relations Bureau
Difi A. Johansyah
Head of Bureau