Statement by the Governor of Bank Indonesia: BI Rate Lowered 50 bps to 11.75% - Bank Sentral Republik Indonesia
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October 21, 2020


Today, August 8, 2006, in the Board of Governor’s Meeting, Bank Indonesia lowered the BI Rate 50 basis points (bps) to 11.75%. This decision was adopted in light of the continued macroeconomic stability in Indonesia, reduced risks from external factors, findings from various surveys and the economic and monetary outlook.  The decision also takes into account the ongoing efforts to achieve the inflation target of 8%±1% for 2006 and 6%+1% for 2007.
In overall terms, economic developments in July 2006 have reinforced confidence of steady improvement in macroeconomic stability.  This is reflected in lower than expected inflation, appreciation in the rupiah, and improvement in Indonesia’s credit rating.  Even so, various domestic demand indicators show that aggregate demand has not expanded as strongly as predicted.  Household consumption has improved, although only on a modest scale, while no significant improvement has taken place in investment.
Constrained domestic demand and softening of inflation expectations contributed to lower than expected inflation for July 2006.  During the month, inflation reached 0.45% (mtm), bringing cumulative CPI inflation for January-July 2006 to only 3.33% (ytd) and inflation for the past year to 15.15% (yoy).  Similarly, core inflation held reasonably stable at 3.10% (ytd) and 9.58% (yoy).
The rupiah exchange rate recorded modest appreciation accompanied by subdued volatility, with performance strengthened by the upgrading of Indonesia’s rating and improvement in the global economy.  Point-to-point, the rupiah gained 2.08% from Rp 9,263 to Rp 9,070 to the US dollar, with the monthly average appreciating from Rp 9,370 for June to Rp 9,131 for July 2006.  Driving this gain were improvements in risk factors, reflected in the upgrading Indonesia’s credit rating by S&P in response to improved macroeconomic performance and stable fundamentals.  These conditions were also buoyed by positive external sentiment from expectations of a pause in interest rate hikes by the US Fed on August 8, 2006.
Meanwhile, the domestic economy has developed greater resilience to shocks from escalating world oil prices, as indicated by the oil and gas trading surplus and fiscal resilience in the aftermath of the fuel price hike. Financial market have responded vigorously to the positive developments with short-term capital inflows recorded at USD1.1 billion during July and the strengthening of Indonesia’s international reserves to USD41.8 billion in the first week of August 2006.
The lowering of the BI Rate in May and July 2006 has had a positive even if limited effect on bank deposit and lending rates.  As a result, loan disbursements in June 2006 mounted substantially by almost Rp 10 trillion to reach Rp 757.3 trillion.  Despite this, compared to the position at end-December 2005, bank credit was up by only Rp 27.2 trillion, representing 3.72% expansion.  In view of the forecasts for further improvement in economic activity, credit expansion is predicted to gather pace before the end of 2006.  This optimism is not only explained by falling interest rates, but also lower credit risk reflected in the reduction in NPLs from 8.8% to 8.7%.
Although bank financing performed below earlier forecasts, non-bank sources of financing (stocks, bonds, and non-bank financial institutions) have shown encouraging growth.  Total value of new share offerings in the first half of 2006 reached Rp 7.4 trillion, with bond issues adding a further Rp 4.9 trillion. During June 2006, external financing for the private sector similarly expanded by USD705 million.
In the second half of the year, stronger economic activity is predicted in response to improved macroeconomic conditions.  For the time being, this upswing will not impact prices, and thus inflation is predicted to remain on track with the inflation target for 2006 and 2007.  Nevertheless, Bank Indonesia will keep a close watch on external risks from the continued upward movement in oil prices and the global monetary tightening cycle.
Today, in a decision based primarily on improvement in macroeconomic stability and market confidence combined with reduced external risks and greater clarity in the future direction of the US Fed Funds rate, the Board of Governors lowered the BI Rate 50 bps from 12.25% to 11.75%.  This interest rate move is also expected to reinvigorate consumer and business optimism and in turn provide stimulation for the real sector without giving rise to excessive inflationary pressure.

Jakarta, August 8, 2006
Directorate of Strategic Planning
And Public Relations

Budi Mulya



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