BI Rate Stays at 6.50% - Bank Sentral Republik Indonesia
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May 23, 2019

No. 12/42/PSHM/Humas

In the Board of Governors' Meeting convened on 3 September 2010, Bank Indonesia decided to hold the BI Rate at 6.50%. However, in view of the potential for future inflationary pressure and the considerable excess liquidity in the banking system, the Board of Governors is stressing the importance of raising the Primary Statutory Reserve Requirement from 5% to 8% of bank's third party rupiah deposits. The additional 3% held in Primary Statutory Reserves will be remunerated at 2.50% p.a. This policy combination is considered adequate to safeguard monetary stability and financial system stability amid the present high rate of capital inflows. Similarly, to promote the banking intermediation function, the Board of Governors has also imposed a statutory reserve requirement based on the LDR (loan to deposit ratio) as a means of ensuring credit growth firmly based on prudential banking principles. Under this requirement, the lower limit of the LDR is 78% and the upper limit 100%. A bank with an LDR outside this range will be subject to a disincentive based on variance in the LDR from the targeted range. If the LDR is higher than the target but the bank maintains adequate capital, it will receive an incentive. The new statutory reserves policy will be phased in with the primary statutory reserve requirement effective on November 1, 2010 and the LDR statutory reserve requirement effective from March 1, 2011. Detailed information is presented in the annex to this press release.

This decision is based on the present developments in the Indonesian economy, marked by a more vigorous upward trend on the demand side compared to supply side response. The robust pace of domestic demand is being driven primarily by household consumption while investment has begun to climb, but has not provided optimum support for supply side improvement. The buoyant domestic demand has fuelled brisk growth in imports. The strength of domestic demand contrasts with the slowing trend in global economic recovery marked by a slowdown in the economies of China and some advanced nations led by the United States and Japan. Alongside this, the economic outlook for emerging markets has generally improved, particularly in Asia.

In externals, the balance of payments continues to post a healthy surplus, bolstered by a strong surplus in the capital and financial account. Inflows of FDI capital were up significantly, although portfolio capital inflows remain dominant in line with more positive foreign investor perspectives of the outlook for the Indonesian economy. However, the balance of trade surplus is expected to decline due to the sharp rise in imports fuelled by the mounting pace of domestic economic activity. In the outcome of these various developments, international reserves at August 31, 2010 reached USD81.3 billion, equivalent to 6.1 months of imports and servicing of official debt. The balance of payments surplus, positive investor perceptions of risk and attractive yields during August 2010 all contributed to further appreciation in the rupiah.

The Board of Governors is especially concerned about the rising trend in inflationary pressure. The overall CPI inflation at August 2010 reached 6.44% (yoy). Alongside this, core inflation in August 2010 came to 4.53% (yoy). Inflation in volatile foods remains strong despite easing slightly from the preceding month, while inflation in administered prices continues at a brisk pace due to a rise in electricity billing rates.

Concerning financial system stability, the Board of Governors regards present conditions as well under control with support from the robust condition of the banking sector despite risks and improvement in the banking intermediation function.  This is indicated, among others, by the high capital adequacy ratio (CAR) at 16.6% and the safe level of non-performing loans (NPLs) gross at below 5.0%. Improvement in the banking intermediation function is reflected in more robust credit expansion at 20.3% (yoy) in August 2010. Bank Indonesia will keep a close watch on banking developments to ensure the healthy operation of the intermediation function.

In view of these various developments, the Board of Governors stresses the importance of policy action from Bank Indonesia and of coordination with the Government to keep future inflation on track with the established inflation target. For the time being, the policy focus is on effective control of excess liquidity not channelled into real sector without disrupting the banking intermediation function. In addition, Bank Indonesia will take further action to reinforce essential actions, including closer coordination with the Government at central and regional levels.

A complete report on the deliberations of the 3 September 2010 Board of Governors’ Meeting, featuring macroeconomics developments and monetary policy, is presented in the Monetary Policy Review (MPR) on the Bank Indonesia website (www.bi.go.id/web/en/Publikasi).

Jakarta, 3 September 2010
Office of the Governor

Dyah N.K. Makhijani
Director

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