Statement by the Governor of Bank Indonesia: Bank Indonesia Lowers BI Rate 50 bps to 11.25% - Bank Sentral Republik Indonesia
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October 31, 2020

Today, September 5, 2006, in the Board of Governor’s Meeting, Bank Indonesia announced a 50 bps reduction in the BI Rate from 11.75% to 11.25%. This decision was taken after in-depth discussions lasting two full days on 4-5 September 2006, with evaluation of macroeconomic conditions, findings from various surveys of consumer and producer expectations and the outlook for economic and monetary conditions in Indonesia and worldwide.

In the first month of the second half of 2006, macroeconomic indicators provided added confirmation of the upward trend with higher growth figures for Q2/2006 and renewed optimism for improvement in the economic conditions.  Reflecting this was stronger purchasing power and consumer confidence in relation to income expectations.  These findings were supported by results from the Consumer Survey, which pointed to an upward trend in consumer expectations for economic conditions 6 months into the future and reduced pessimism over current conditions. The Retail Sales Survey also indicated an upward trend in real sales.  In the business community, signs of business optimism were evident in more ambitious plans for hiring of employees. Despite this, the Business Survey did not identify any strong indication of improvement in investment. 
Macroeconomic conditions remain well under control, as reflected in the stable, appreciating exchange rate and subdued inflation. During August 2006, the exchange rate averaged Rp 9,094/USD accompanied by reduced volatility.  This brings the average exchange rate for 2006 to Rp 9,183, representing 5.46% appreciation compared to last year. Key to the exchange rate stability in August 2006 was the improvement in macroeconomic indicators, the attractive yields on rupiah placements, subdued risks and reduced pressure from upward movement in US interest rates.  Positive development in these factors provided strong incentive for capital inflows to the domestic financial market, despite some shift in foreign placements from SBIs to Government Securities and stocks.  These factors combined to strengthen Indonesia's international reserves to USD42.1 billion.  Also contributing to stable macroeconomic conditions was subdued inflation, which maintained a downward trend in August 2006 at 0.33% (mtm) or 14.90% (yoy).  The cumulative measure of CPI inflation since January 2006 was similarly low at only 3.67% (ytd).  Core inflation was recorded at 0.78% (mtm) or 9.68% (yoy).
The Board of Governors’ Meeting also took note of the positive response from economic actors to the Bank Indonesia stance of reduction in the BI Rate. In the financial sector, banks responded to the lower BI rate by easing their rates for funds and credit and subsequently increasing loan disbursements.  Although bank lending widened by only Rp 1 trillion in July 2006, estimates from preliminary data for August place credit expansion at more than Rp 10 trillion.  On the stock market, the JSX Index saw renewed gains from foreign capital inflows driven by positive perceptions of the impact of the interest rate cut on the economic outlook. These perceptions also influenced developments on the government bond market, reflected in reduced yield for government securities and continued strong foreign demand. In response to these conditions, the forex market has remained stable. In the real sector, the reduction in the BI Rate has stimulated consumer confidence and producer optimism for improvement in the economy.

Looking ahead, with economic growth in Q2/2006 ahead of earlier forecasts, Bank Indonesia holds greater optimism for higher than projected GDP performance at year end, especially if there is more efficient disbursement of budget funds for government capital expenditures.  At this point, the economic upturn has not impacted prices, and thus inflation is predicted to hold within the targets established for 2006 and 2007. At the same time, Bank Indonesia will keep a close watch on external risks from escalating oil prices and the continued global monetary tightening cycle.

Based on the fundamental considerations of improved macroeconomic stability, strengthened confidence at Bank Indonesia for achievement of the inflation target at 8±1% for 2006 and 6±1% for 2007 and renewed market confidence, today’s Board of Governors’ Meeting has decided to lower the BI Rate 50 bps from 11.75% to 11.25%.  This interest rate move is also expected to reinvigorate consumer and business optimism and in turn stimulate activity in the real sector without triggering excessive inflationary pressure.

Jakarta, 5 September 2006
Directorate of Strategic Planning
and Public Relations

Budi Mulya



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