Monetary Policy Statement by the Governor of Bank Indonesia - Bank Sentral Republik Indonesia
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October 26, 2020
No.7/ 98 /PSHM/Humas

Today, November 1, 2005, Bank Indonesia convened the monthly Board of Governors' Meeting for a comprehensive review of the latest developments in the economy, prospects, and monetary policy response.  In the opinion of the Board, the economy continues to show an adequate level of growth, despite some indications of slowing.  However, inflationary pressure has mounted sharply, reaching a peak in October 2005 in the wake of increased fuel prices.  For the immediate future, in a decision that takes account of medium and long-term inflation control and efforts to sustain the momentum of economic growth, the Board of Governor's Meeting has raised the BI rate by 125 bps to 12.25%.
Evaluation of the Economy, October 2005
Economic growth performance remains adequately strong, although coming short of earlier forecasts.  Various indicators point to vigorous investment activity and continued improvement in exports.  Levels of capacity utilization are also steadily improving. There has also been modest improvement in the balance of payments, notably in the capital account.  In response, international reserves strengthened to USD32.6 billion.

Inflation mounted significantly in October, driven by increased fuel prices and the second round impacts such as hikes in transport rates.  Further inflationary pressure came from seasonal factors, with Indonesia celebrating the Ramadhan fasting month and Eid-ul-Fitr festivities.  During October 2005 alone, inflation reached 8.70% (m-t-m), bringing inflation for the January-October 2005 period to 15.65% (y-t-d).  Nevertheless, core inflation is estimated to remain steady at 7%-8% despite a rising trend.  It should also be noted that some neighboring countries, such as Thailand, Malaysia, and India, have also been affected by inflationary pressure driven by high international oil prices.

The rupiah exchange rate is now maintaining an appreciating trend, most importantly because of the increased interest rate differential in the wake of the rise in the BI Rate and improvement in the risk index.  Higher levels of foreign portfolio investment also contributed to the strengthening in the rupiah.  Stable movement in the rupiah has been supported by effective management of liquidity on the rupiah money market, with tight market conditions on some days effectively preventing encouragement of currency switching.  These developments have proved sufficient to mitigate the impact of downward movement in regional currencies against the USD brought on by the monetary tightening cycle in the US.

Despite the various risks in the financial sector, the banking sector overall has seen heartening performance with steady improvement in the bank intermediary function.  The present level of credit expansion is on track for achievement of the targeted 22% expansion for 2005.  As of September 2005, growth in disbursed loans reached 20.2%, bringing the LDR to 66.1%.  There has also been significant expansion in credit to the SMME sector, with disbursed loans reaching Rp 331.1 trillion or 51% of total bank lending.  However, NPLs ratio has risen to 8.76% as a result increased credit risk in line with rising interest rates and mounting risks in the real sector.  Looking ahead, this escalation in credit risk will call for even greater vigilance from the banking sector.
Prospects and Policy Response
In the last two months of 2005, the economy is predicted to maintain the current expansion with growth reaching 5.5%-6%.  Likewise, there will be sustained pressure on macroeconomic stability.  In the longer term outlook for 2006, with inflation having peaked in October 2005 and taking note of developments in various determining factors, inflation will gradually ease and is forecasted to come within the range of 6.5%-8.5% for the coming year.

After weighing these developments and the economic and monetary outlook, the Board of Governors' Meeting has decided to raise the BI Rate by 125 basis points to 12.25%.  The increase in the BI Rate is the BI policy response aimed at consistently guiding expectations of inflation towards achievement of the medium-term inflation target.

For greater effectiveness in monetary control, Bank Indonesia has taken steps to improve the operational side of monetary policy by extending the windows for the O/N FASBI at a rate set at 500 bps below the BI Rate.  In a similar measure designed to boost the incentive for banks to carry out their intermediary function, on December 1, 2005, Bank Indonesia will raise the deposit interest paid on bank demand deposit funds held at Bank Indonesia in excess of the statutory reserve requirement to 6.5%.

Bank Indonesia will also continually update its assessment of the economy and make policy adjustments as necessary.  Further to this, Bank Indonesia and the Government will coordinate their actions as before in order to maintain macroeconomic stability and keep inflation under control in line with the established inflation target.
Jakarta, November 1, 2005
Rizal A. Djaafara
Bureau Chief



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