Monetary Policy Statement By The Governor Of Bank Indonesia - Bank Sentral Republik Indonesia
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October 23, 2019
No.7/ 94 /PSHM/Humas

Today, Tuesday, October 4, 2005, the Board of Governors of Bank Indonesia convened the Monthly Board of Governors' Meeting for an in depth review of the latest economic conditions, prospects, and the monetary policy response.

Evaluation of the Economy, Q3/2005

Economic indicators in Q3/2005 show that the domestic economy is moving less vigorously than previously expected. On the demand side, indicators for investment, private consumption, and exports show a declining trend.  On the supply side, a number of structural problems continue to hamper efforts to build added economic capacity.  These conditions have resulted in further narrowing in the output gap.

On the external side, the balance of payments is performing below expectations.  The capital account is marked by very limited capital inflows that contrast with the heavy burden of servicing foreign debt.   In the current account, imports are mounting considerably faster than exports.

The deteriorating trend in the balance of payments has brought downward pressure on the rupiah.  Added to this is the strengthening of the dollar from the ongoing monetary tightening cycle in the US.  Taken together, this has triggered a bandwagon effect among domestic corporations and individual customers placing even greater pressure on the rupiah.

Following these developments, inflation at the end of Q3/2005 reached 9.06% (y-o-y), surpassing earlier estimates.  On the supply side, the high CPI inflation figure is also explained by stronger inflation in volatile foods and rising public expectations of inflation linked to the planned fuel price increases that figured prominently in the public discourse near the end of the third quarter.

In the financial sector, the condition of the banking system remains stable.  In the latest data, NPLs stand at 5.0% (net) or 8.9% (gross) while the CAR for the banking system is recorded at 18.9%.  The bank intermediary function has showed consistent improvement, reaching 54.5%.  Despite this, various macroeconomic developments, in particular the hike in fuel prices, rising interest rates, and depreciation in the exchange rate mean that the banking system must take proactive measures to sustain performance, particularly in regard to credit quality and bank liquidity.

Prospects and Policy Response

Looking ahead, the economic growth forecast for 2005 and 2006 has been revised slightly downwards to 5.7% and 5.9% from the previous estimates of 5.9% and 6.1%.  The outlook for slower economic growth is linked mainly to the current levels of investment.  Added to this, exports are likely to perform below expectations with world trade volume falling short of earlier forecasts.  For these reasons, no improvement is expected in balance of payments for the immediate term. 

Concerning prices, the recent fuel price hike will become a source of inflationary pressure in coming months.  After taking into account the direct and indirect impact from the new fuel prices set by the government, Bank Indonesia predicts significant upward pressure on the CPI.  Adding to this will be seasonal factors associated with religious festivities.

After careful assessment of these developments and the economic and monetary outlook for coming months, the Board of Governors' Meeting has decided to raise the BI Rate 100 basis points to 11.0%. The rise in the BI Rate to 10% is a policy response by BI that consistently seeks to guide expectations of inflation in line with achievement of the medium-term inflation target and continues to reflect a reasonable level of interest rates.

In the view of Bank Indonesia, mounting expectations of inflation and depreciation in the exchange rate could put macroeconomic stability at greater risk.  Policy actions aimed at maintaining macroeconomic stability are necessary to ensure sustainable economic growth in the long-term.

Bank Indonesia will continuously update the assessment of the economy and make policy adjustments as needed.  Bank Indonesia will also strengthen coordination with the government to minimize the wider impact of increased fuel prices on inflation.
  

Jakarta, October 4, 2005
Bureau of Public Relations 
 

Rizal A. Djaafara
Bureau Chief

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