Statement by the Governor of Bank Indonesia:Bank Indonesia Lowers BI Rate 25 bps to 8.50% - Bank Sentral Republik Indonesia
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October 29, 2020
No. 9/21 /PSHM/Humas

Today, Thursday 7 June 2007, the Bank Indonesia (BI) Board of Governors’ Meeting decided to lower the BI Rate 25 bps to 8.50%. This decision was taken after consideration of progress achieved towards the inflation target, set at 6%±1% and 5%±1% for 2007 and 2008, and an in-depth assessment of the latest economic and financial developments.

During Q1/2007, the economy maintained overall expansion with improved equilibrium in the growth structure. Economic growth during the quarter reached 5.97%, surpassing the earlier Bank Indonesia projection. Key to the improved growth was the resilience of domestic private consumption and vigorous export performance. Various indicators of capacity utilisation and inventory turnover point to strong short-term supply side response to cyclical demand in the economy. Realised Gross Domestic Capital Formation in Q1/2007 was recorded at 7.51%, up from 1.14% for the same period in 2006.

May 2007 saw continued stability in monetary conditions offering a more robust basis for sustainable economic growth. The rupiah exchange rate appreciated from an average of Rp 9,093/USD in April 2007 to Rp 8,838/USD in May 2007. Support for appreciation in the rupiah came from healthy performance in the balance of payments, continued attractiveness of rupiah yields, robust international reserves, controlled level of exchange rate risk exposure in the banking system, fiscal resilience and substantial levels of excess global liquidity. With the stronger rupiah and subdued inflation expectations, core inflation in May 2007 eased to 5.62% (y-o-y), representing a low for the past 6 years. CPI inflation also eased to 6.01% (y-o-y) in May 2007, down from 6.29% (y-o-y) in April. The reduction in CPI inflation came in response to subdued rice prices, absence of hikes in administered prices and the strengthening of the rupiah.

Banking indicators showed steady improvement, reflecting the ongoing stability of the banking system and contribution to recovery in the real sector. Despite this, credit expansion in April 2007, like before, was focused more on private sector financing rather than government-related sectors, such as infrastructure projects. Bank credit expansion was recorded at 16.5% (y-o-y) with the LDR strengthening to 65.8%, the highest level reached in the past 6 years. In April 2007, the magnitude of credit expansion was Rp 12.4 trillion (m-t-m). Growth in total banking assets came to 16.8% (y-o-y) representing an increase of Rp 246.2 trillion. Bank deposit funds mounted Rp 176.6 trillion (y-o-y) to Rp 1,299.8 trillion. In April 2007, the NPL ratio was largely unchanged from the preceding month. The NII for the banking system edged upwards from Rp 7.7 trillion to Rp 7.8 trillion, largely from stronger lending growth in comparison to deposit funds and assets. Concerning bank capital, the CAR ratio mounted slightly from 20.7% in March 2007 to 21.2% in April 2007, with capital expanding at a faster rate than risk-weighted assets.

The Board of Governors' Meeting also took note of current trends in economic activity and future prospects. Economic growth is predicted to mount higher in 2008, accompanied by improved equilibrium in the growth structure compared to 2007.  Key to this will be investment activity in the private sector spurred by steady improvement in the investment climate, an expanded fiscal stimulus delivered through government capital and development expenditures and low costs for financing and capital goods imports during 2007. Assuming there will be no increases in administered prices and resultant inflationary shocks in 2008, the Board of Governors’ Meeting sees a strong probability for achieving the 5±1% inflation target for 2008.

However, the Board of Governors’ Meeting also discussed some matters demanding careful attention. First, economic growth in 2008 will depend heavily on improvement in the investment climate and realised levels of government capital/development expenditures. Second, efforts are necessary to address non-financing obstacles to infrastructure projects to pave the way for more optimum performance in the bank intermediary function and higher economic growth. Third, policies are needed to ensure more effective allocation of regional government development funds to development activities that will promote recovery in the local real sector.

For this to be achieved, the monetary policy pursued so far to maintain stability needs to be complemented by concrete sectoral policies to promote increased growth in the real sector. This is especially important in view of the average levels of investment credit and working capital credit, now approaching record lows for the past 14 years. In addition, Bank Indonesia will maintain the existing close, harmonious coordination with the Government and continue implementing a cautious, measured monetary policy while keeping a careful watch on emerging dynamics within the context of the national and global economy.

Jakarta, 7 June 2007
Office Of The Governor
Budi Mulya



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