Statement by the Governor of Bank Indonesia: Macroeconomic Stability on Track, Rising Growth Optimism, BI Rate Stays at 9% - Bank Sentral Republik Indonesia
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May 27, 2019
No. 9/ 16 /PSHM/Humas

Today’s Board of Governors’ Meeting at Bank Indonesia was the Quarterly Meeting convened for comprehensive discussion of two key agenda: First, a review of macroeconomic developments and dynamics of business in the real sector with the objective of pursuing the economic growth target, and Second, an assessment of monetary and financial stability and the decision on the monetary policy stance for the coming month.

Economic growth in Q1/2007 is estimated at 5.4%, in line with earlier forecasts. This strengthened growth was supported by performance in exports and renewed expansion in private investment. However, growth in private consumption remains low. Indications of stronger private sector investment came from growth in construction investment reflected in rising demand for cement, iron and steel, expansion in investment credit to various business sectors and an improvement in Gross Fixed Capital Formation driven by increased domestic investment in machinery.

The balance of payments is expected to show stronger performance for Q1/2007 compared to the forecast at the beginning of the year. During Q1/2007, the balance of payments surplus climbed to USD3.3 billion, ahead of the earlier forecast of USD2.9 billion. Contributing to this was a stronger than expected current account surplus. With the balance of payments outperforming earlier forecasts, international reserves at the end of March 2007 were recorded at USD47.2 billion.  In response to these developments, the rupiah gained value during Q1/2007. At the end of March 2007, the average rupiah exchange rate reached Rp 9,101 to the USD, having appreciated 0.34% from Rp 9,132 per USD in the preceding quarter. The strengthening the currency was also supported by other fundamentals, reflected in the continued attractiveness of rupiah yields and subdued risks.

Bank Indonesia’s monitoring and studies indicates that inflation remained low in Q1/2007, consistent with the beginning of year projection. Measured annually (y-o-y), CPI inflation in March 2007 was relatively stable at about 6.5%. Factors contributing to the stable level of inflation include the monetary policy stance earlier adopted by Bank Indonesia, minimum inflationary pressure from administered prices and plentiful supply of food commodities and especially seasonings that offset inflationary pressure from escalating rice prices. Regarding fundamentals, inflationary pressure remained low due to the effect of exchange rate appreciation and continued slack demand.

Looking ahead, the economic growth projection for the 2007-2008 period is still on track with the earlier forecasts of 6.0% for 2007 and 5.7%-6.7% for 2008 with indicators pointing to further improvement in economic growth. The major sources of economic growth will be exports and rising domestic demand, particularly from sustained investment growth in line with improving business perceptions. Government actions for improvement of the investment climate and the ongoing programme for accelerated construction of needed infrastructure – mainly for electrical power and transportation projects – are expected to foster higher levels of investment growth. Exports will maintain a high level of growth, supported by agricultural production and manufacturing.  The planned deficit spending by the government will also contribute to the targeted economic growth.

Bank Indonesia’s assessment also indicates that financial stability will remain sound. The financial sector and real sector continue to respond positively to the reductions in the BI Rate, as reflected in the stable exchange rate, rising share prices and declining yield on short-term government securities.

In the domestic banking industry, overall performance points to stronger growth, reflected in the expansion in credit, assets and capital. Bank lending in February 2007 was up Rp 8.9 trillion at Rp 826.3 trillion (month-to-month/m-t-m), with growth year-on-year at Rp 111.7 trillion (y-o-y). Capital increased by a slim margin to 20.9% from the previous month’s level of 20.7%.  Total bank assets were up Rp 2.6 trillion or 0.2% (m-t-m) at Rp 1,693 trillion, representing annual growth of Rp 226.8 trillion or 15.5% (y-o-y). Net Interest Income (NII), however, fell slightly from Rp 7.9 trillion in January 2007 to Rp 7.3 trillion in February 2007. This is explained by a drop in loan interest income in the wake of the decline in total credit during January 2007. The increase in total bank assets and reduced NII resulted in a thin decline in Return on Assets (ROA) from 2.8% to 2.7% (m-t-m). Alongside this, NPLs remained steady with NPLs gross at 6.8% and NPLs net at 3.4%.

In assessing these conditions and developments, macroeconomic stability was adequately safeguarded during Q1/2007. Business also gathered momentum in the real sector. The various policies currently pursued by the Government and Bank Indonesia are expected to take economic growth to a higher level. Bank Indonesia policies in recent months, including the reduction in the BI Rate and relaxation of some banking regulations, are expected to stimulate the bank intermediary function in support of recovery in the real sector. The banking industry has an opportunity to make steady reductions in the Cost of Loanable Funds and improve operational efficiency to pave the way for more affordable loan interest rates and increased lending to productive sectors.

Having made these many different calculations and considered in depth the developments described above, the present decision concerning Bank Indonesia monetary policy is to remain in neutral. In today’s Board of Governors’ meeting, the BI Rate was kept on hold at 9%. Burhanuddin Abdullah emphasised: “The purpose of this decision is to monitor more closely the impact and progress of the various policies issued by the Government and Bank Indonesia. This action is part of an effort to bring monetary conditions into line with conditions in the real sector and the banking system. Bank Indonesia is confident of achievement of the 6%±1% inflation target for 2007 and the subsequent 5%±1% target for 2008.”

At this time, monitoring of prices in the administered prices, staple goods and volatile foods categories and other macroeconomic indicators points to the need for a closer watch on the possibility of a future rise in inflation.  Public expectations of inflation are also predicted to follow an escalating trend in line with the improving outlook for domestic demand in response to increased economic activity.

To anticipate these developments, Bank Indonesia must first monitor and study in greater depth the various related macroeconomic indicators to ensure that the 2007-2008 CPI inflation target can be achieved as planned.  Nevertheless, Bank Indonesia believes that space still exists for future reduction the BI Rate, in keeping with optimism for resurgence in business activity in the real sector. “In our opinion, the present decision concerning the BI Rate still allows sufficient room for the banking system to bring lending rates down to considerably lower levels," added Burhanuddin.

Bank Indonesia will keep a close watch on macroeconomic developments with the ultimate objective of achieving price stability. In the monetary sector, Bank Indonesia policy will remain focused on building macroeconomic stability in support of sustainable economic growth through consistent application of the Inflation Targeting Framework (ITF).  Concerning the banking system, Bank Indonesia will pursue further measures for improvement of the bank intermediary function as part of its commitment to promote financing for the real sector, as it has also done in the recent relaxation of some policies.

Jakarta, 5 April 2007
Directorate of Strategic Planning
and Public Relations

Budi Mulya
Director

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