Statement by the Governor of Bank Indonesia : BI Rate Reduced Further 50 bps to 10.75% - Bank Sentral Republik Indonesia
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October 29, 2020
No.8/ 53 /PSHM/Humas

In the Board of Governor's Meeting held today, Bank Indonesia decided to cut the BI Rate 50 bps from 11.25% to 10.75%. This decision was taken after in-depth discussion and an evaluation of the macroeconomic outlook, findings from consumer and producer surveys and the outlook for economic and monetary conditions in Indonesia and worldwide.

In the assessment by the Board of Governors, the Indonesian economy showed significant improvement during Q3/2006, marked by continued macroeconomic and financial stability.  During Q3/2006, economic growth reached an estimated 5.40%, up from the Q1 and Q2/2006 performance of 4.70% and 5.22%. This improvement has been driven mainly by high government consumption and strong net exports. Signs are evident of renewed albeit only modest growth in private consumption. No significant improvement, however, has been observed in investment outside the construction sector. On the supply side, the construction sector and transport and communications sector again charted high growth, followed by manufacturing and the trade, hotels and restaurants sector.

Concerning the external position, the balance of payments recorded an even taller surplus during Q3/2006. This surplus was supported primarily by the current account, a result of strong export performance driven by high world commodity prices and continued robust growth in the world economy and international trade. Imports expanded at a slower rate due to the present condition of domestic demand. The capital and financial account also recorded a continued surplus in response to the high rate of capital inflows seeking to profit from high yields on rupiah placements.  Also crucial to capital inflows were positive market perceptions of government action in fiscal and monetary policy. These factors combined to strengthen Indonesia's international reserves to about US$42.36 billion at the end of Q3/2006.

The improving trend in the balance of payments has contributed to the stability of the rupiah. During Q3/2006, the rupiah averaged Rp 9,117 to the US dollar, essentially unchanged from Rp 9,115 in the preceding quarter. Point-to-point, the rupiah appreciated 0.8% from Rp 9,263 to Rp 9,190. Domestic factors contributing to a stable rupiah included the improvement in macroeconomic indicators, attractive yields on rupiah placements and decline in investment risk indicators. Externally, a key factor was the US Federal Reserve decision to keep the Fed Funds rate on hold. 

Inflation in September remained subdued with a downward trend. With inflation for September recorded at 0.38%, inflation for the calendar year (January-September) reached 4.06% while year-on-year inflation came to 14.55%. The downward inflationary trend benefited not only from conducive macroeconomic conditions and restrained domestic demand, but also the minimum impact from hikes in administered prices and low volatile foods inflation. However, core inflation was still high at 9.13% (yoy) despite having eased from 9.58% (yoy) in the previous quarter, a development explained mainly by persistently strong public expectations. Nevertheless, pressure from external factors and the output gap remained minimal.

The series of cuts in the BI Rate since May 2005 has met with positive responses from actors in both the financial sector and real sector. In the banking sector, the reductions in the BI Rate have been passed on to deposit rates and lending rates, albeit on a limited scale. The intermediary function, despite hampered performance in the past, showed major improvement in August 2006 with credit expansion at Rp 10.8 trillion. Accompanying this development was improvement in credit risk, with the non-performing loans (NPLs) ratio easing to 5.0% (net) and 8.8% (gross). Falling interest rates have also stirred renewed interest in the capital market, reflected in the rise in the JSX Composite Index to 1,535 and drop in Government Securities yield to 10.77% at end-Q3/2006.  

In corporate financing, companies made increasing use of equity financing from reserves and the capital market.  Increased use was also observed in other funding sources, particularly trade finance and inter company accounts, thus reducing corporate dependence on domestic bank financing.

In the real sector, the downward trend in interest rates has stirred renewed optimism. The Consumer Expectations Survey conducted by Bank Indonesia indicates a growing trend in consumer confidence in both current economic conditions and the economic outlook. The Production Index and Business Tendency Index released by BPS also showed improvement. The downward movement in interest rates will promote more vigorous growth in the construction, transport and communications and financial sectors, with the trade and manufacturing sectors also gathering momentum. This assessment reinforces confidence in the ongoing improvement in the real economy, which has received an added boost from the series of cuts in the BI Rate since May 2006.  

Looking ahead, the outlook is for steady improvement in economic growth. GDP growth in 2006 is forecasted to be slightly ahead of the initial 5.5% projection. Supporting this outlook are stronger exports, the onset of recovery in purchasing power and better investment performance in the second half of 2006.  The overall macroeconomic outlook augurs for continued stability.  The downward trend in CPI inflation is expected to last to the end of 2006. CPI inflation could come slightly below the original projection at just under the 8%±1% targeted range.  In 2007, CPI inflation is forecasted at the upper limit of the 6%±1% target.  Externally, the balance of payments surplus for 2006 is predicted at USD13.2 billion, with international reserves at end-2006 reaching USD43.3 billion.

Continued stability in macroeconomic conditions and declining inflation provide added assurance that the inflation targets for 2006 and 2007 will be met.   In addition, the reductions in the BI Rate augur well for further improvement in the bank intermediary function and business optimism, which in turn will boost economic growth.   Looking ahead, if inflationary pressures and risks remain subdued, the possibility remains open for further reductions in BI Rate at a gradual, cautious pace.

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

Budi Mulya



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