Statement by the Governor of Bank Indonesia: BI Rate Unchanged at 8.0% - Bank Sentral Republik Indonesia
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October 25, 2020


The Board of Governors’ Meeting convened at Bank Indonesia today decided to leave the BI Rate unchanged at 8.0%. This decision was taken after an evaluation of Indonesia's macroeconomic conditions in 2007, the economic and monetary outlook, various risks confronting the economy and achievement of the inflation target, set at 5%±1% for 2008, 4.5%±1% for 2009 and 4%±1% for 2010. The Meeting also noted the success of inflation targeting in the past two years, with inflation recorded at 6.60% in 2006 (target 8%±1%) and 6.59% in 2007 (target 6%±1%).

“The achievement of the inflation target is closely linked to macroeconomic stability and financial system stability maintained through careful coordination between the Government and Bank Indonesia,” explained Governor of Bank Indonesia Burhanuddin Abdullah. This coordination is vital given that inflation is generated not only by core components (exchange rate, output gap and expectations) but also by administered prices and volatile foods, such as cooking oil, rice and other commodity items. “The ability of the Government to control fluctuation in these prices through sectoral policy packages has contributed significantly to the success of inflation targeting in the past 2 years,” added Burhanuddin.

Indonesia’s overall economic performance in 2007 showed heartening results with growth estimated at 6.3%, the highest annual growth rate since the 1997 crisis. This is a major achievement, especially in view of the formidable challenges confronting the economy in 2007 brought on by the subprime mortgage crisis in the United States that has plunged international money markets into turmoil, as well as soaring world oil prices.

Like before, the predominant driving force for Indonesia’s economic growth comes from consumption and exports boosted by rising private investment. The strong improvement in exports has had significant positive impact on the balance of payments. Despite market turmoil and weakening performance in industrialised economies, Indonesia's balance of payments recorded a surplus. Key to this were changes in regional export markets (ASEAN and Asia in general), including diversification of markets for Indonesian export commodities away from the traditional focus on developed countries with new emphasis on China and India. In addition, the rupiah has become less sensitive to changes in world oil prices. In the first half of 2007, the rupiah underwent 1.8% appreciation. Later in the year, in the wake of the subprime mortgage crisis and soaring world oil prices, the rupiah weakened by a modest 1.1%. Accordingly, for 2007 overall, the rupiah was valued at Rp 9,140 to the US dollar, an appreciation of 0.29% compared to Rp 9,167 for 2006. International reserves at end-2007 thus mounted to USD56.9 billion, equivalent to 5.7 months of imports and servicing of government debt.

At the end of 2007, the BI Rate was stable at 8.0%, having eased 150 basis points from 9.5% at the beginning of the year. The sustained reductions in this reference rate were welcomed by business and met with positive response from market actors. In November 2007, loan interest rates maintained their downward trend. Interest rates for working capital credit and investment credit that month averaged 13.16% and 13.19%, down from the end-2006 positions of 15.07% and 15.10%. Similarly, the average rate for consumption credit eased to 16.39% from the previous 17.58%. This downward trend in interest rates was followed by improvement in the intermediary function and banking performance indicators.

Bank performance steadily gained during 2007 with the strengthening of the intermediary function alongside financial system stability. Banking system assets climbed to Rp 1,895 trillion in November 2007 (up 11.9% ytd). Bank lending reached Rp 1,004.6 trillion, representing 20.6% expansion (ytd). In November alone, credit mounted by Rp 23.5 trillion, bringing annual credit expansion to 24.3% (yoy). With credit expansion in 2007 surpassing growth in depositor funds, the LDR strengthened to 69.9%, the highest level since the economic crisis. Even with the robust credit expansion, Indonesia's national banking system maintained prudent management of credit risk, reflected by the drop in NPLs gross from 6.98% to 5.41% and NPLs net from 3.63% to 2.29%.

The Board of Governors predicts a year of sustained high economic growth in 2008 underpinned by macroeconomic stability. Growth in 2008 is forecasted at 6.2%-6.8%. Nevertheless, the progress and optimism is also tempered by caution expressed in the Board of Governors’ Meeting over the continued high levels of permanent components in Indonesia’s inflation, attributable among others to: (i) lack of significant improvement in capacity and economic productivity, (ii) susceptibility of inflation to movement in volatile foods and public expectations, (iii) relative lack of deepening of Indonesia’s financial market and (iv) considerable excess liquidity.

“In view of these concerns and the inflation target for 2008, the Board of Governors holds the view that consistency in macroeconomic policy and fiscal policy coordination are prerequisites that must remain in place in order to achieve higher quality economic growth. For this reason, the commitment, hard work and coordination of the entire nation will be vital for strengthening the quality of economic growth in 2008,” added Burhanuddin.  

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). In the banking sector, Bank Indonesia will press forward with the consolidation programme for building a sound, strong and competitive banking system. Alongside this, further efforts will be pursued for improvement in the bank intermediary function to ensure that business financing needs can be effectively met.

Jakarta, 8 January 2008
Lukman Boenjamin



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