In the Board of Governor’s Meeting on Thursday, 6 December 2007, Bank Indonesia decided to lower the BI Rate 25 bps from 8.25% to 8%. Today’s decision is based on a comprehensive evaluation of the Indonesian economy, which is showing steady improvement, the trend in the inflation rate and the economic outlook. Bank Indonesia is confident that the BI rate cut will not disrupt achievement of the inflation target, particularly in the medium to long term. The lower rate is expected to deliver an economic stimulus and sustain momentum for stronger economic growth while maintaining macroeconomic stability in coming years. This decision also takes account of risks, especially in relation to the high level of international oil prices.
In the assessment by Bank Indonesia, the impact on economic expansion and inflation brought about by external shocks and surging oil prices remains manageable. The Government policy response to the high oil prices is expected to mitigate pressures on fiscal sustainability while sustaining economic growth momentum in order to reduce unemployment and poverty. This policy will be complemented by carefully timed, measured actions by Bank Indonesia to manage rupiah volatility. Bank Indonesia will make optimum use of its policy instruments to guide inflation towards the established target. Achievement of the future inflation target will also be supported with transparent and effective public communications. Given the policy synergy between the Government and Bank Indonesia, improving economic fundamentals and growing resilience, the outlook for improved economic growth remains stable and on track.
Bank Indonesia is optimistic that inflation in 2007 will come within the 6%±1% targeted range. Despite looming inflationary pressures in 2008, overall progress is consistent with a long-term declining trend. For this reason, common efforts from various sides to anticipate the risk of escalating price increases will be crucial to achievement of the 5%±1% inflation target in 2008. Bank Indonesia notes several risks that could spur inflationary pressure in 2008, and which therefore call for vigilance. Among these are spiralling world oil prices that could potentially drive price increases for goods, perceptions among economic actors of the sustainability of fiscal management, progress in the implementation of various investment policy packages and the ability of the government to deal with disruptions in supply and distribution of staple goods.
Optimism for achievement of the inflation target is borne out by the downward trend in prices. In November 2007, inflation reached 0.18%, down from 0.79% in the preceding month. Annual CPI and core inflation in November 2007 were recorded at 6.71% and 6.25%. Only muted inflationary pressure was observed in volatile foods and administered prices compared to the previous month. Increased demand put only modest upward pressure on prices, being offset by investment-driven expansion in national production capacity.
The rupiah remained stable during November 2007. Volatility was managed within stable limits, despite some depreciation during the month. The monthly average value of the rupiah weakened in comparison to previous period. The rupiah traded at an average Rp 9,271 in November 2007, representing 1.8% depreciation from Rp 9,101 in October 2007. The depreciation is partly explained by outflows of foreign capital on the financial market. This also put pressure on share prices, with the JCI falling to 2,563 points before rallying at end-November to the 2,688 mark.
In overall terms, economic expansion in Indonesia is set to maintain the same pace as in the previous quarter. Q4/2007 economic growth is forecasted at 6.5%, bringing growth for the year to 6.33%. The key factors driving this growth are rising consumption and exports. The strong showing in exports is expected to bring even further improvement in the balance of payments. In 2007, the balance of payments is set to chart an even greater surplus compared to the preceding year. At the end of November 2007, international reserves were recorded at USD54.9 billion, equivalent to 5.5 months of imports and servicing of government foreign debt.
In the banking system, the downward trend in bank lending rates continues. During October, downward movement took place across all bank lending rates. The intermediary function showed further gains marked by a steady upward trend in lending to about Rp 980 trillion, with annual credit expansion reaching 23.1%. In a similar vein, bank depositor funds mounted further to Rp 1,419 trillion, with annual growth at about 15%.
The outlook is for continued macroeconomic and financial system stability alongside sustained economic expansion. Economic growth is set to improve over the past year on the strength of rising domestic demand and a healthy showing in exports. The continued strong export performance and forecasts of high capital inflows auger for a sizeable balance of payments surplus. This in turn will provide added support for exchange rate stability and mitigate future inflationary pressures.
Bank Indonesia will keep a close watch on macroeconomic developments with the ultimate objective of achieving price stability. Monetary and banking policy will maintain a course of prudent, measures actions to promote macroeconomic and financial system stability in support of sustainable economic growth.
Jakarta, 6 December 2007
Office Of The Governor