Statement by the Governor of Bank Indonesia : BI Keeps BI Rate at 8.25% - Bank Sentral Republik Indonesia
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October 25, 2020

In the Board of Governors' Meeting convened on Monday, 8 October 2007, Bank Indonesia decided to hold the BI Rate at 8.25%. This decision is based on a comprehensive evaluation of the outlook for achieving the inflation target, set at 6%±1% and 5%±1% for 2007 and 2008, and current economic conditions and projections, coupled with identification of risks.

The decision to keep the current level of BI rate is an attempt to consolidate the credibility gains made thus far in maintaining stability in macroeconomic indicators and the banking system. These achievements, if kept in place, will pave the way for sustained economic expansion.

During Q3/2007, the Indonesian economy continued to show good overall progress, despite coming under pressure from the sub-prime mortgage crisis in the US. “The Indonesian economy has proved resilient in the face of fallout from the sub-prime mortgage crisis on global financial markets,” said Governor of Bank Indonesia Burhanuddin Abdullah. This resilience, bolstered by prudent monetary policy, has prevented permanent disruption from the turmoil to the exchange rate equilibrium, thus ensuring continued macroeconomic stability. Looking ahead, the considerable uncertainty over adjustments in global financial markets in response to the sub-prime mortgage crisis demands a consistent level of prudence in monetary policy.

On the domestic front, rising inflation in September 2007 was fuelled mainly by escalating international prices for foodstuff commodities. In addition, stronger inflation expectations driven by price increases in advance of the religious festive season prompted an increase in core inflation. Q3/2007 recorded higher inflation compared to the preceding quarter. Year-on-year CPI and core inflation for Q3/2007 were recorded at 6.95% and 6.03%. Although this trend is explained by seasonal factors, Bank Indonesia will keep a close watch on developments. “A common effort to maintain future macroeconomic stability coupled with improvements in market structures for distribution of staple goods will be key to holding inflation at a level on track with the inflation target for 2007 and 2008,” added Burhanuddin.

The economic continued to expand in Q3/2007, with growth potentially reaching 6.3%. Key to this growth performance is increased government consumption and strong performance in exports, buoyed by vigorous demand and high commodity prices on the global market. An added factor was the resumption of capital inflows to Indonesia during September 2007. Despite the weakening in the average rupiah exchange rate to Rp 9,250 during Q3/2007, representing 3.2% depreciation compared to Q2/2007, the rupiah began to regain equilibrium with the easing of the turmoil in global markets. Key to this process are Indonesia’s robust international reserves and consistent track in monetary policy.

Robust figures are again predicted for Indonesia’s balance of payments with the current account surplus exceeding the original projection. This has been reinforced by worker remittances from overseas workers that also represent a substantial contribution to the balance of payments. The strong balance of payments position reinforces international reserves, recorded at 52.8 million US dollars at end-Q3/2007 or equivalent to 5.4 months of imports and servicing of official debt.

The continued resilience of the banking system amid the recent turmoil has reinforced market confidence in the quality of Indonesia's macroeconomic management.  Performance in the banking and financial system is steadily advancing with the improved operation of the intermediary function. Lending by banks in all categories is up, with total credit expansion in August 2007 at Rp 21.2 trillion. The annual rate of credit expansion thus reached 21.79% (y-o-y), on track with the targeted 22% (y-o-y) credit expansion for 2007 achievable with monthly average growth in lending at Rp 17.6 trillion. The increased lending alongside reduced growth in depositor funds (Rp 13.4 trillion in August 2007) resulted in an increase in the LDR to 67.3%, the highest level since the economic crisis.

Looking ahead, the outlook is daunted by risks of a slowing domestic economy and rising inflation.  External risks include a slowdown in the US economy, further increases in world oil prices, palm oil and other commodities and the persistently high levels of uncertainty over global adjustments to the turmoil in the sub-prime mortgage market. On the domestic front, efforts are needed to reduce inflationary pressure from likelihood of continued shortages of kerosene and some foodstuffs. Demand is predicted to rise in keeping with the outlook for improved economic growth.  To respond to this demand, actions are needed to boost production capacity through resolution of structural barriers, increasing the rate of loan disbursements to large-scale government projects and maximising the use of fiscal measures. 

In this regard, Bank Indonesia will maintain intensive coordination with the Government in the common drive for sustainable development.  This will be reinforced by prudent, measured monetary policy stance and ongoing monitoring of the dynamics in the economy and the latest economic data. In Bank Indonesia’s opinion, the 8.25% BI Rate can still provide a stimulus for future growth in the Indonesian economy while allowing room for banks to make further cuts in interest rates. In the banking system, ongoing actions for promotion of the bank intermediary function and monitoring of the bank consolidation programme will be intensified. In addition, efficiency improvements in the national banking system will continue to receive important priority.

Jakarta, 8 October 2007

Budi Mulya



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