BI Leaves BI Rate Unchanged at 6.50% - Bank Sentral Republik Indonesia
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October 20, 2019

No. 12/31/PSHM/Humas

In the Board of Governors' Meeting convened on 5 July 2010, Bank Indonesia decided to hold the BI Rate at 6.50%. This decision was taken after a comprehensive evaluation of economic performance and the future outlook of the economy, which is showing steady overall improvement. The Board of Governors believes that the BI Rate at this level is consistent with achievement of the 5%±1% inflation target in 2010 and 2011 and remains conducive to recovery in the domestic economy amid the persistently high level of global risks from the debt crisis in some European nations.

Global economic continues to forge ahead despite pressure on global financial markets and concerns over the sustainability of recovery in Europe. The latest indicators suggest that economic recovery in advanced nations, led by the US and Japan, will gather strength during 2010. Similarly, economic recovery is forging ahead in emerging economies, led by Asia and particularly China, India and the ASEAN-5, and providing support for the global economic recovery. So far, the impact of the crisis in Europe has been felt more in increased global financial market volatility and has not visibly slowed global economic recovery in 2010. However, the various programmes for stabilization and resolution of the European debt crisis are predicted to lower the economic growth outlook for the region in 2011, despite the confidence that these programmes will have no significant influence on the overall outlook for global growth.

At home, the economy is showing steady improvement alongside secure levels of monetary stability and financial system stability. During Q2/2010, improvement in the global economy bolstered Indonesia's external sector performance and investment, with domestic recovery gaining strength as the economy is no longer reliant solely on consumption. Bank Indonesia estimates Indonesia's Q2/2010 economic growth at about 6%. Improvement in external sector performance is reflected on the current account surplus, estimated at USD1.75 billion in Q2/2010 or ahead of the originally forecasted USD1.23 billion. Similarly, the capital and financial account posted a higher estimated surplus at USD3.09 billion compared to the earlier USD1.16 billion forecast. The robust current account surplus and capital and financial account surplus are consistent with the improvement in the global economy along with rising world commodity prices and renewed growth in capital inflows in response to the upward revision of the credit rating outlook and more upbeat international perceptions of Indonesia. The policy package launched by Bank Indonesia on 15 June 2010 also met with positive response from domestic and international market actors and is envisaged to provide added reinforcement in monetary management and financial market deepening. In response to these developments, the rupiah exchange rate maintained an overall appreciating trend in Q2/2010 accompanied by reduced volatility. Indonesia's international reserves at end-Q2/2010 reached USD76.3 billion, equivalent to 5.9 months of imports and servicing of official debt.

Concerning prices, the Board of Governors takes note of indications of renewed inflationary pressure. Inflation in June 2010 reached 0.97% (mtm), representing an annual rate of increase in the CPI at 5.05% (yoy). Inflationary pressure was stoked mainly by soaring inflation in the volatile foods category and particularly seasonings, recorded at 11.51% (yoy) due to seasonal uncertainties. However, inflationary pressure from fundamentals, reflected in core inflation, has held at a modest 3.97% (yoy) with support from adequate supply-side response to rising demand and the appreciating exchange rate trend. Similarly, little visible impact has resulted from increases in electricity billing rates with inflation in administered prices still at a modest 2.60%.

Banking system stability held firm amid the onset of renewed credit expansion. The banking industry remains in stable condition reflected in the high capital adequacy ratio (CAR) and safe level of non-performing loans (NPLs) at less than 5%. The banking intermediation function is also steadily improving with credit expansion at end-June 2010 recorded at 18.6% (yoy). Lending growth for 2010 overall is projected to reach 22%-24%, driven primarily by improved confidence among economic actors in the economic outlook. Bank Indonesia will continually monitor banking conditions and promote improvements in banking efficiency for more optimum operation of the banking intermediation function.

Looking forward, the upward trend in the global and domestic economy during Q2/2010 is set to continue. Growth in 2010 is forecasted to near the upper limit of the 5.5%-6.0% projection. Exports and investment are expected to keep climbing, providing added boost to mounting consumption in support of higher levels of economic growth in 2010 and 2011. In 2011, economic growth is predicted in the range of 6.0%-6.5%. Concerning prices, the Board of Governors notes signs of future inflationary pressure in the present trend of mounting intensity. During the coming months before the end of 2010, inflationary pressure is predicted mainly from higher electricity billing rates, the arrival of the Ramadhan fasting month and Eid-ul-Fitr festivities and higher food prices associated with seasonal uncertainties. In 2011, inflationary pressures could be spurred by an increasingly limited supply-side response to the expected sustained growth in demand. Bank Indonesia will keep a close watch on the rising inflationary pressure and make the necessary adjustments to monetary policy responses to ensure that inflation remains on track with the established targeting range at 5%±1% in 2010 and 2011.

For a complete report on macroeconomic developments, monetary policy and the future outlook, refer to the Monetary Policy Report on the Bank Indonesia website (www.bi.go.id).

Jakarta, 5 July 2010
Office of the Governor

Dyah N.K. Makhijani
Director

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