BI Rate For Quarter III-2005 Set At 8.5% - Bank Sentral Republik Indonesia
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November 30, 2020
No. 7/71/PSHM/Humas

In line with the use of interest rates as monetary policy signal, The Board of Governors’ Meeting (RDG) today decided that for the first time the BI Rate is set at 8.5%.  This is the first RDG since BI implemented the   Inflation Targeting Framework, which explicitly publishes the policy interest rate, BI Rate, to the public. The Board of  Governors views that interest rate setting may control inflation rate towards the medium term inflation rate target and at the same time create a favorable climate to maintain the economic growth momentum which is moderately high at the moment. The interest rate would be valid for quarter III-2005, although adjustments may take place in the coming months in line with overall economic development and monetary conditions.

RDG views that the Indonesian economic development in quarter II-2005 is still growing at a high rate followed by an expansionary pattern and increasing role of investments. This result was quite favorable, despite the slowing growth of the global economy which is covered by a high level of uncertainty. The GDP of quarter II-2005 is estimated to have grown in line with previous estimates of 5.5%-6.0% (yoy).  On the demand side, the  economic  expansion had been supported with investments growth at a relatively high level of about 15% in quarter II-2005.  The increase in investments had caused an increase in imports particularly for raw materials and goods. Meanwhile, exports still grew at a limited rate and relied more on natural resources-based commodities and agri-industrial products.   However, there is an initial indicator of an increase in the exports of industrial and manufacturing products.  Meanwhile, imports grew at a high rate in line with strengthened domestic demand. With these developments, the current account performance experienced a deficit earlier than previous projection. The capital account recorded a deficit, particularly  due to the large amount of private sector debt repayments, capital outflow of investments portofolio, and unimproved capital inflow, particularly FDI.  Overall, the pressure on the Indonesian Balance of Payment (NPI) was also  reflected on the increasing pressure on the  Rupiah exchange rates.

CPI Inflation still under control but at a relatively high rate at  7.42% (yoy) at end of  June 2005. Fundamentally,  the high  inflation rate was caused by the high inflation expectation related to administered prices and weakening exchange rates.  External factors,   particularly the weakening of exchange rates had brought about inflationary pressure, but at a rate lower than previous averages.  Administered inflation for quarter II-2005 was still fairly high at 10.45% particularly due to the increase in hospital and transportation (taxi) rates. Meanwhile, volatile food inflation rate was recorded at 5.51% - slowing due to harvest time. The monetary and inflation control policy had succeeded in minimizing the second round impact of the increae in fuel oil (BBM) prices and decreasing inflation expectation, although it is still at relatively high rate.

Rupiah Exchange rates still tended to depreciate. In average, the Rupiah depreciated by  3.0% to Rp9,556/USD during quarter II. Fundamentally speaking, the pressure on the Rupiah was related to the worsening of balance of payment performance, together with the existence of sentiments regarding the global strengthening of US dollar and the increasing oil price. These had increased the demand for foreign exchange both for imports and off shore loan repayments.

Performance of national banks up to quarter II-2005 relatively improved, particularly in terms of stable capital level and increased intermediary function.  The total assets of banks increased by  Rp 44.2 trillions, which particularly came from increased third party  and interbank funds. Meanwhile,  banking loans increased by Rp 33.0 trillions. This showed that the banking intermediary function was still improving.   On the other side, the capital level was still adequate at 20.0%.  The bank loan growth target for quarter II 2005 would expectedly be exceeded, as shown by the realization of large banks’ loan related business plans. However, the increased risk resulting from the increased loans sebagai and tightening competition might give pressure on assets quality as well as profit margin.

Looking ahead, the economic prospect for the coming quarter and for overall year 2005 is still favorable. The 2005 GDP is estimated to remain high and growing at about 5.9% (yoy). The increased growth will also be accompanied by a more balanced expansionary pattern with increasing investment. This will, among others, be supported by the stronger commitment from the government to create a  favorable investment climate. Meanwhile, the initial indicators of improvement in export structure towards more   manufacturing products would expectedly strengthen in line with the increase in world trade volume.   Meanwhile, future inflationary pressure is estimated to remain high as reflected in the consistently high core inflation rate which is estimated to reach  7% (yoy) by the end of year 2005.

Considering the future macroeconomic and inflation estimates, the tight bias monetary policy will be continued.  In relation to this, Bank Indonesia had set a reference rate (BI Rate) at 8.5% for the coming three months. Adjustments to the reference rate may be made as needed. This stance will be followed by optimally absorbing excess liquidity from banks using available monetary instruments. To assist in maintaining economic stability, Bank Indonesia will continue taking various anticipatory steps on several factors, both internal and external, which may disturb macroeconomic stability particularly the exchange rates and inflation. To guard against the volatility of rupiah exchange rates,  foreign exchange sterilization/intervention will be done in a well measured manner. 

Meanwhile, in order to strengthen macroeconomic stablity and maintain the economic growth momentum, the government and Bank Indonesia had agreed to improve coordination related to macroeconomic policy and efforts to improve investment climate and exports as well as improvement in several structural problems, including those in the foreign exchange market.

Jakarta, July 5, 2005 
Directorate of Strategic Planning
and Public Relations
Halim Alamsyah



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