Statement of the Governor of Bank Indonesia: "Keeping the Tight Bias Monetary Policy, BI Rate is Maintained at 12,75% Rate" - Bank Sentral Republik Indonesia
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October 19, 2019
No.8/ 19 /PSHM/Humas
  1. The national economic condition has generally signified an upward trend, as concluded in the Meeting of the Board of Governors on April 5, 2006 that evaluated the economic development in First Quarter 2006. The economic growth in Q1/2006 was predicted to improve to 4,58%, slightly higher than predicted earlier this year which had been 4,35% (yoy). This positive development was supported by maintained stability of the macro economy, namely higher exchange rate, decrease of inflation rate, and surplus balance of payment. Bank Indonesia is in the opinion that the optimism held for the national economy throughout the year of 2006 will grow higher, especially backed by a more conducive situation in global economy, a better performance of balance of payment, improved fiscal stimulus, and intensive government effort in improving the investment climate. PDB in 2006 is forecasted to be slightly higher and approaching the upper margin of projected rate at 5,0-5,7%.
  2. From the demand side, a slowing down of expansion in the Q1/2006 (compared to the previous quarter) was due to a low growth in domestic demand, while export net was still rising. The slow expansion of domestic demand was influenced by several factors mostly related to the worsen investment climate and weaken public consumption ability since the end of 2005. The slowdown of domestic demand caused a lower import demand. Nevertheless, a worsen condition of the slowing down of consumption could still be avoided due to the function of government consumption in the forms of raising the salary of civil service officers (PNS) and the channeling of Direct Investment (BLT). The condition of domestic demand also limited the growth of economic capacity. From the point of view of supply, significant halt predicted to occur on several sectors were industrial manufacturing sector, trading sector, transportation sector, and communication sector.
  3. Externally, the performance of balance of payment in was Q1/2006 generally better according to the higher surplus both of the ongoing transactional balance and the capital and financial balance. This improvement caused a raise of the foreign exchange reserve to USD 41,1 billion or equals to 4,5 months of imported needs and payment of Foreign Loan by the Government. Nevertheless, the raise of NPI surplus should be carefully watched because the surplus of ongoing transactional balance was more likely caused by non-oil import, especially essential materials for Indonesian export goods, and there is the possibility that this will slow down the import of non-oil commodities for the next period. Moreover, the structure of capital and financial balance was still dominated by portfolio investment which tends to be sensitive of market sentiment causing a capital reverse to be more likely to occur.
  4. Surplus condition of Balance of Payment supported the increased value of rupiah exchange rate in the First Quarter of 2006. The significant upward trend of rupiah exchange rate was followed by an increased volatility that reached Rp. 9.299 per US Dollars or appreciated at 6,9% compared to the Fourth Quarter of 2005. The appreciation for exchange rate was caused by the huge amount of international portfolio brought into domestic financial market. The condition of foreign exchange market such as this one will affect the policies made. In the short-term, considering the big amount of short-term capital investment able to support the rupiah rate, the effort to maintain perception of investor in the financial market is becoming more important in order to avoid a sudden reverse of capital flow. In the long run, several attempts must be taken to support the performance of balance of payment with improvement of fundamental factors such as a more competitive export and more attractive condition for investment of Foreign Direct Investment (FDI).
  5. Consumer Price Index (CPI) inflation in the First Quarter of 2006 was recorded at 15,74% (yoy) or 1,98% (qtq), lower than the projection because of the delay to raise Base Electricity Tariff (TDL). Meanwhile, the core inflation is still stable on the high level of 9,64% (yoy) or 1,63% (qtq) due to the significant improvement of expected inflation. In the First Quarter of 2006, the pressure of inflation is mainly caused by volatile food inflation in the first two months as a result of raising the Base Selling Price of rice and imported inflation. Nevertheless, these external factors did not have great impact on CPI because at the same time, Rupiah has significantly strengthened. Meanwhile, the pressure of inflation caused by output differences was not quite significant due to the decline of domestic economic expansion and lowered inflation of administered group caused by suspended raise of TDL.
  6. From banking side, banking performance has shown some improvement. The amount of credit and Third Party Fund (TPF) have already increased although not as much as expected. Nonetheless, several risk factors must still be considered, such as the increasing non-performing loans (NPLs), which was signified by the raise of gross NPL from 8,7% in January to 9,3% in February (Net NPL rose from 5,% to 5,7%). In the future, credit channeling is predicted to improve along with higher growth of economy and improved stability of macro economy.
  7. Looking ahead, there are risks that all should be aware of, even when there is a greater optimism for the improved performance of the economy. First, the high prices of oil and the ongoing implementation of tight policies of global monetary. Second, problems of the infra structures, especially transport facilities in many regions that should be anticipated to prevent raised prices of volatile foods. Third, the many obstacles during the distribution of the state budget for government capital buying and the implementation of government policies to improve the investment climate.
  8. With considerations to all the abovementioned development and due to the dominant existence of several risk factors that may disturb the economic performance in the future, the Meeting of the Board of Governors has decided to stipulate the following policies: First, the applicable BI rate today, which is at 12,75%, should be maintained until the macro economy stability is well kept, especially for the expected inflation and the pressure of reversed capital flow. BI is in the opinion that if the positive tendency of the development during the last couple of months continues, then the possibility to gradually lower the interest rate might be taken earlier than the original plan. Second, due to the high liquidity excess failed to be channeled to the real sectors, the applicable provisions concerning Demand Deposit Adequacy Ratio should still be applied.

Jakarta, April 6, 2006
Office of The Governor

Budi Mulya
Director

 
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