Statement by the Governor of Bank Indonesia : BI Rate Lowered 25 bps to 9.00% - Bank Sentral Republik Indonesia
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May 27, 2019
No. 9/ 12 /PSHM/Humas

Today, Tuesday 6 March 2007, Bank Indonesia (BI) decided on yet another 0.25% reduction in the BI Rate from 9.25% to 9.00%. This decision was taken after considering the 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. “Today’s decision is based on the prudent stance and consistency in the monetary policy pursued by BI,” emphasised Governor of Bank Indonesia Burhanuddin Abdullah.
 
Overall macroeconomic conditions in February 2007 remained stable with some indicators pointing to further improvement in the economy. The major sources of economic growth are exports and rising domestic demand, particularly from resumption of investment growth. Despite some slowing, exports maintained a high level of growth with strong performance in the agricultural and manufacturing sectors. A Bank Indonesia survey reported stronger producer confidence in the outlook for improvement in business sentiment.  On the consumer side, however, the survey reported declining confidence in future economic conditions. This trend in particular will need to be addressed in future policy actions.
 
Despite some weakening, the rupiah remained generally stable in February with declining volatility. The level of the rupiah was bolstered by improved performance in the balance of payments, management of risks and the continued attractiveness of yields on rupiah instruments. Calculated as an average, the rupiah strengthened slightly from Rp 9,071/USD to Rp 9,067/USD, with volatility down from 0.50% to 0.25%. Point-to-point, however, the rupiah weakened by a thin 0.46% from Rp 9,093/USD to Rp 9,135/USD. The downturn at month end came in response to the global impact of falling share prices in China and the mounting inflationary pressure in the US that is likely to see the Fed postpone reductions in interest rates. The sudden external developments had a modest impact on the domestic financial market, marked by weakening in the JSX Index and the rupiah. ”Nevertheless, the resilience of Indonesia’s sustained macroeconomic stability and fundamentals means that any impact from these surprise events will only be temporary," explained Burhanuddin.
 
CPI inflation remained subdued, while inflation for Q1/2007 was still on track with the earlier projection despite some disruptive effect from natural disasters. CPI inflation for February 2007 reached 0.62% (mtm), with cumulative inflation recorded at 1.67% (ytd) and year-on-year inflation at 6.30% (yoy). Increased rice prices were offset by lower prices in other food categories, most importantly seasonings. The increase in rice prices is likely to be only temporary. Inflationary pressure from administered prices had only minimum impact, due to the absence of price increases for strategic commodities.
 
In the banking industry, overall performance showed further improvement reflected in higher earnings and capital. Although bank lending narrowed by Rp 15.5 trillion in January, this contraction is regarded as a seasonal trend at the beginning of each year and credit expansion is therefore expected to resume in subsequent months. The reduction in outstanding credit was also accompanied by a Rp 7.4 trillion drop in depositor funds. Similarly, the overall bank LDR was down slightly from the same period last year at 63.9%.

Net Interest Income (NII) for the banking system as a whole totalled Rp 7.9 trillion, the highest level achieved since the crisis 9 years ago. Return on Assets strengthened from 2.6% to 2.8%, in line with the increased NII. NPLs also showed improvement following the completion of debt restructuring for major debtors at some of Indonesia's largest banks. NPLs gross was recorded at 6.8%, having eased from the end-2006 position of 7.0%. Similarly, NPLs net was 3.4%, down from 3.6%.

In the Bank Business Plans submitted to Bank Indonesia, banks have outlined their plans for improving their performance in the intermediation function. With the present government actions for improvement in the investment climate and reduction in micro risks in combination with amendments to Bank Indonesia regulations related to loan disbursements, banks are expected to achieve the targeted level of credit expansion. Loan disbursement will also be distributed more equitably within the production sector and consumption sector, with emphasis on lending to MSMEs. 

In regard to this, the Board of Governors believes that the sustained reductions in the BI Rate since mid-2006 will bring optimum benefit to the domestic economy if matched by actions to sustain the momentum of economic recovery through more rapid improvements to the investment climate and reductions in high costs and other structural distortions in the economy.
 
For the future, the outlook is for continued improvement in economic growth, even if below the ideal level. The interest rate reductions by Bank Indonesia have created space for business to seek more economically priced non-bank financing alternatives to keep pace with rising domestic demand. In Bank Indonesia’s opinion, the various public purchasing power indicators have not been particularly strong or sustainable.
 
For the time being, business is able to respond to rising domestic demand by increasing capacity utilisation and expanding production capacity. Additionally, if the impact from the February 2007 floods can be handled properly, the disaster will have minimum impact on the economy. In view of these conditions, Bank Indonesia will consistently pursue a more measured, cautious track in monetary policy. Concerning the banking system, Bank Indonesia will continue to promote the intermediary function through implementation of the eight policy pillars announced at the beginning of the year in order to support accelerated economic recovery.

Subdued inflation, exchange rate movement consistent with its internal equilibrium with low volatility and a sound, competitive banking industry are the key pillars for the common drive for high growth in 2007. For our economy, this will be a good year to establish the appropriate strategy and priorities for sectoral and sub-sectoral development that will contribute to growth and creation of employment for more workers in coming years. ”It must be understood that accommodative monetary and banking policies do not offer a panacea for all the economic issues and problems that confront us today," added Burhanuddin.

Jakarta, 6 March 2007
Directorate of Strategic Planning
and Public Relations


Budi Mulya
Director

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