Statement by the Board of Governors of Bank Indonesia: BI Rate Increased 25 bps to 8.5% - Bank Sentral Republik Indonesia
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May 23, 2019
No. 10/ 26 /PSHM/Humas

Today on 5 June 2008, the Board of Governors' Meeting at Bank Indonesia decided to raise the BI Rate by 25 bps to 8.50%. The decision to increase the BI Rate was taken after careful assessment of the latest developments in the global and domestic economy.

"Stubbornly high world food and energy prices and the impact of the fuel price hike have generated heightened inflationary pressure in 2008. Bank Indonesia also sees that the upward trend in domestic demand has contributed to pressure in core inflation. These developments underpin the decision by Bank Indonesia to raise the BI Rate this month," said Boediono, the Governor of Bank Indonesia.

Boediono went on to explain, "Inflation in 2008 could mount to about 11.5%-12.5% (yoy). However, we predict that with the various existing and future policies to be implemented by Bank Indonesia and the Government, inflation will ease, returning in 2009 to the single digit level in the range of 6.5%±1%. Bank Indonesia will focus on mitigating the indirect impact of soaring fuel and food prices. To this end, Bank Indonesia will make optimum use of all available monetary instruments, including adjustments in the BI Rate, control of exchange rate volatility, absorption of excess liquidity, optimisation of open market operations (OMO) and other policy measures."

"In further steps for optimum control of OMOs, Bank Indonesia will switch the operational target from the 1-month SBI rate to the overnight interbank rate with effect from 9 June 2008. With this change, Bank Indonesia will manage movement in the overnight interbank rate at about the level of the BI Rate," added Boediono.

"Bank Indonesia policy will remain firmly anchored in implementation of the inflation targeting framework within a free floating exchange rate regime. An important part of this policy will be mitigation of exchange rate volatility in order to curb inflationary pressure.  Looking ahead, Bank Indonesia sees room for appreciation in the rupiah in line with the strong balance of payments position," added Boediono.

In May 2008, monthly CPI inflation was well above the historical trend, surging to 1.41% from 0.57% in the preceding month. Measured annually, inflation in May 2008 came to 10.38%, up significantly from annual inflation one month earlier (8.96%). Accordingly, year-to-date inflation in May 2008 reached 5.47%. The hike in subsidised fuel prices at the end of the month significantly boosted inflation in May 2008.   Price increases across a range of commodities in advance of the fuel price hike were an added contribution to high inflation during the month. With the impact of the increased fuel prices unlikely to be fully reflected in the inflation that took place in May 2008, inflationary pressure driven by fuel prices is expected to persist in coming months.

While inflationary pressure is running high, in the judgement of Bank Indonesia the Indonesian economy continues to demonstrate healthy resilience. This is evident from the vibrant Q1/2008 economic growth at 6.3%. Driving this growth performance was increased non-construction investment. On the other hand, escalating international market prices for some agricultural and mining commodities contributed to more robust exports. The upward price trend was also supported by strong demand from emerging market countries.

Indonesia's balance of payments is forecasted to chart healthy performance, mainly on the strength of the current account. In Q2/2008, the current account is predicted to chart another high surplus at USD 2.6 billion or 2.3% of GDP.  Bank Indonesia predicts that the balance of payments for 2008 overall may outperform earlier forecasts. The factor of high international commodity prices is still a support for export performance.  The continued strength of the balance of payments is indicative of the resilience of our nation's economy and will have a positive effect on stability in the rupiah. At the end of May 2008, international reserves were recorded at a hefty USD 57.5 billion. At the same time, the rupiah exchange rate was largely stable in May compared to preceding months.

The overall condition of the banking industry reflects strong performance and resilience. The intermediary function showed further improvement, with funding mostly from depositor funds. Bank lending climbed Rp 22.9 trillion (2.1%) in April 2008, up from Rp 1,080.1 trillion to Rp 1,103.1 trillion. Measured year-on-year (April 2008-April 2007), credit expanded by Rp 247.7 trillion or about 29%. About 71% of these loans were allocated for working capital and investment. During the same period, depositor funds edged upwards 1.1% from Rp 1,466.2 trillion (March 2008) to Rp 1,481.8 trillion (April 2008). As a result of more vigorous expansion in credit compared to depositor funds, the LDR for the banking system climbed from 73.7% (March 2008) to reach a new high of 74.4% in April 2008. At the same time bank non-performing loans (NPLs), gross and net, were up slightly from 4.33% to 4.39% and from 1.78% to 1.83%.

Looking ahead, Bank Indonesia will stay the course with a consistent, measured monetary policy to curb inflation as described above. Bank Indonesia will also maintain intensive coordination with the Government in response to the various dynamics of the domestic and international economy.

Jakarta, 5 June 2008
Directorate of Strategic Planning
and Public Relations

Dyah N.K. Makhijani
Director

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