BI Rate Stays at 6.50%<br /> - Bank Sentral Republik Indonesia
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October 20, 2019

No. 12/43/PSHM/Humas                                                         

In the Board of Governors' Meeting on 5 October 2010, Bank Indonesia decided to hold the BI Rate at 6.50%. The decision is based on a comprehensive evaluation of the performance and outlook for the Indonesian economy, which is showing overall improvement. Bank Indonesia has taken note of the rise inflationary pressure amid heavy inflows of foreign capital and considerable levels of excess liquidity.  At this time, the Board of Governors regards the economic liquidity management as the higher priority. The current level of BI Rate is consistent with achievement of the inflation target and remains conducive in safeguarding financial stability and promoting bank intermediation for supply-side response to accelerated demand.        

In the opinion of the Board of Governors, the global economic recovery process is moving forward despite concerns over slowdown in some major economies. Although financial markets dipped under pressure from the slowing global economy, the present condition of global financial markets is generally stable with an improving trend. With economic recovery proceeding at a modest pace, advanced economies are experiencing only moderate inflationary pressure.  However, emerging markets are showing signs of escalating inflationary pressure fuelled by more robust economic growth. Accordingly, monetary policy response in developed nations continues to be accommodative, while some emerging markets are taking further action to normalise policy in order to curb inflationary pressure.

The Indonesian economy maintained brisk growth throughout Q3/2010, driven mainly by household consumption and exports.  The buoyant level of household consumption has been fuelled by widespread availability of consumer financing, mounting consumer optimism and low import prices.  Alongside this, export growth is driven mainly by strong demand from China and India and rising international commodity prices.  With consumption and exports forging ahead, investment has begun to pick up, as indicated by increased imports of machinery and raw materials and rising levels of working capital credit.  The leading high-growth sectors, like before, are trade, hotels and restaurants and the transport and communications sector (non-tradables), consistent with expanding domestic demand. The strengthening performance of exports produced yet another current account surplus in Q3/2010, although down from the preceding quarter.  Nevertheless, the capital and financial account again produced a sizeable surplus on the back of heavy capital inflows that have bolstered the value of rupiah. Taken together, the balance of payments is expected to chart a hefty surplus in Q3/2010, with international reserves at end-September 2010 rising to USD86.5 billion or equivalent to 6.5 months of imports and servicing of official debt.

Regarding prices, up to September 2010 the Board of Governors notes the pressure in the CPI inflation resulted mainly from volatile foods.  CPI inflation in September 2010 reached 0.44% (mtm) or 5.80% (yoy). Pressure mostly stemmed from the surge in volatile foods inflation from seasonal effect of recent festivities.  Nevertheless, inflationary pressure reflected in core inflation held at a modest 4.02% (yoy), supported in part by the appreciating trend in the exchange rate. Similarly, inflationary pressure from administered prices was comparatively low at 5.60% (yoy), due to the absence of strategic decisions affecting government-set prices during September 2010.

Stability in the banking system remains firm alongside steady improvement in credit growth. Like before, the solid condition of the banking industry is reflected in the high capital adequacy ratio (CAR) and subdued level of the gross non-performing loans ratio (NPLs) at below 5%. Banking intermediation has strengthened further, as evident in credit growth at end-September 2010 which reached 21.2% (yoy). In 2010, working capital credit has expanded at a faster rate than consumption credit, and looking forward, credit growth will continue to be channelled into productive sectors. In response to these developments, credit growth for 2010 overall is forecasted at 22%-24%, in line with the business plans prepared by banks. Key to the credit expansion is enhanced confidence on the economic prospect.

Looking forward, steady improvement is predicted in global and domestic economic developments. In 2010, economic growth is projected in the range of 6.0%-6.3%. For 2011, the forecasted rate of growth is 6.0%-6.5%. This growth will be driven by continued robust household consumption, improved external sector performance as the global economy charts further recovery and higher investment in tandem with mounting domestic and external demand.  Regarding prices, the Board of Governors is cognizant of the risks that may fuel inflation.  First is the escalating trend in demand, which is growing faster than supply. Second, anomalies in weather conditions may persist, with potential to disrupt production and distribution of staple needs. Third is the possibility of planned increases in administered prices. Bank Indonesia is keeping a close watch on this potential inflationary pressure and is strengthening policy coordination with the Government at both the central and regional levels. Bank Indonesia will respond with the policy mix necessary to keep inflation on track with the established target at 5%±1% in 2010 and 2011 and 4.5% + 1% in 2012.

Monetary Policy Report (MPR), available on the Bank Indonesia website (www.bi.go.id). 
                              
Jakarta, 5 October 2010
 Office of the Governor

Dyah N.K. Makhijani
       Director

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