In the Board of Governors' Meeting convened on July 12, 2012, Bank Indonesia decided to hold the BI rate steady at 5.75%. The current policy rate is considered consistent with inflation forecast, which is expected to remain low and contained within its target range of 4.5%±1% in 2012 and 2013. From the external side, Bank Indonesia remains vigilant on global economic slowdown that leads to weaker exports performace amid strong imports, as domestic demand remains strong. In line with that condition, Bank Indonesia will continue to strengthen the management of exchange rate, consistent with its fudamental, and also supported by further measures related to monetary operation and financial deepening in the foreign exchange market to ensure that adjustment in external balance take place in an orderly manner. With those policy measures, pressure on Balance of Payment is expected to subdue in the second half of 2012.
Board of Governors remains vigilant on weaker global economic condition which is still overshadowed by high uncertainty. The time horizon of the crisis resolution in Euro area is expected to be a long-term, albeit some progress in the European Union Summit. In addition to negative sentiment that persists in the global financial market, European economy is expected to fall into recession this year and gradually recover in 2013. On the other side, US economic condition remains vulnerable as the process of fiscal risk resolution still take place. Those condition will have an impact on economic growth in Asian countries, such as China and India, which are the main trading partners of Indonesia. In addition, global commodity prices, including oil prices, continue to decline as global demand worsen, and followed by declining global inflation.
Global economic slowdown has started to affect Indonesia’s external performance so that Indonesia’s economy is expected to chart lower growth relative to previous forecast. As a result of weakening exports performance, Indonesia’s economy in the Q3-2012 is estimated to post lower growth of 6.3%, and expected to arrive at 6.1 – 6.5% and 6.3 – 6.7% in 2012 and 2013. The economic growth is mainly supported by strong domestic demand, as private consumption and investment growth remain high. From the production side, all sectors are expected to chart favorable growth. The main driver to the economic growth is expected to come from, among other, transportation and communication sector, trade, hotel, and restaurant sector, as well as manufacturing sector.
Indonesia’s Balance of Payment is expected to come under pressure in Q2-2012 and tend to improve in the second half of 2012. Current account in Q2-2012 is expected to post higher deficit relative to previous quarter, on the back of slowing exports caused by global economic slowdown amid strong imports to support domestic economic activities. On the other side, surplus in the capital and financial account is expected to remain relatively high, supported by strong FDI and improvement in foreign portfolio inflow. Going forward, adjustment on imports of raw material triggered by declining exports is expected to contain pressures on current account deficit. International reserves at the end of June 2012 reached USD106.5 billion, or equivalent to 5.7 months of imports and government’s external debt services.
Depreciation pressure on Rupiah continues in Q2-2012, albeit with lower volatility relative to previous quarter, supported by stabilisation measures taken by Bank Indonesia. On point-to-point basis, Rupiah depreciated by 2.65% (qtq) to Rp9,393 per USD, or on average depreciated by 2.27% (qtq) to Rp9,277 per USD. Pressure on Rupiah was associated with Euro crisis that trigger higher demand for foreign currency for portfolio rebalancing by non residents. Pressure on rupiah also came from strong imports. Bank Indonesia will continue to take measures to manage adequate liquidity in the foreign exchange market and encourage development of foreign currency monetary instrument to provide support for exchange rate stabilisation, consistent with its fundamental and the movement of other currencies in the Asian region.
Inflation in Q2-2012 remained benign. CPI inflation in Q2-2012 was recorded at 0.90% (qtq) or on an annual basis was recorded at 4.53% (yoy). From the fundamental side, inflation remained in check as reflected in the core inflation, which remained low (4.15%, yoy), attributable to declining global commodity prices and better expectation. In addition, food prices picked up as a result of supply disruption. Meanwhile, administered prices inflation was relatively low as there was no change in government policy on the prices of strategic commodities. Going forward, inflation is expected to remain contained and stay within its target range.
Financial system stability is well-maintained with improving intermediation function to support economic financing. Banking industry shows solid performance, as indicated by secured level of capital in which capital adequacy ratio (CAR) is well above minimum level of 8%, and gross non-performing loan (NPL) below 5%. Meanwhile, banking intermediary also continues to improve, reflected by credit growth in May 2012 that reached 26.3% (yoy). Investment credit recorded high growth, 29.3% (yoy), and is expected to increase economic capacity. Meanwhile, working capital credit and consumption credit grew by 28.9% (yoy) and 20.3% (yoy), respectively.
Going forward, Board of Governors will continue to focus on measures to maintain external balance, especially to maintain exchange rate stability, and contain inflation. In this regard, Bank Indonesia will continue to strengthen the existing monetary and macroprudential policy mix. BI rate policy response is continued to be directed to control fundamental inflationary pressure, in line with macroeconomic outlook. In addition, strengthened monetary operation and macroprudential policy, including maintaining adequate liquidity and promoting financial deepening, are aimed to stabilize Rupiah and manage inflation expectation. In addition, coordination with government will also be strengthened.
A complete report of the July 2012 Board of Governors’ Meeting, presenting macroeconomic developments and monetary policy will be published in the Monetary Policy Report (MPR) and accessible through Bank Indonesia’s website.
Jakarta, 12 July 2012
Head of Public Relations Group
Difi A. Johansyah