BI Rate Steady at 6.5% - Bank Sentral Republik Indonesia
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May 24, 2019

No. 12/39/PSHM/Humas

In the Board of Governors' Meeting convened on 4 August 2010, Bank Indonesia decided to hold the BI Rate at 6.5%. This decision was taken after a comprehensive evaluation of the latest economic developments, which point to steady overall improvement. However, the Board of Governors is taking careful note of the recent onset of higher inflationary pressure and will pursue the necessary monetary and banking policy actions to ensure that future inflation remains on track with the established target at 5%±1% for 2010 and 2011. For the time being, the Board of Governors considers the 6.5% BI Rate adequate to safeguard future inflation expectations while closely monitoring the recent rise in inflation. In the near future, Bank Indonesia will respond with measures to tighten liquidity management without disruption to the bank intermediation function, implemented through changes in the statutory reserve requirement.

The Board of Governors notes that Indonesia's economic growth is on a steady upward trend accompanied by financial system stability. An assessment of economic developments during July 2010 points to improvement in the domestic economy amid persistent risks of global uncertainties, particularly in regard to the slowdown in China's economy and the outlook for US economic recovery. Economic growth is predicted to mount to higher levels with support from rising exports and investment and the continued strength of consumption. On the supply-side, trade and industry are predicted to chart more robust performance in keeping with growth on the demand-side.

The ongoing improvement in the global economy has bolstered the position of Indonesia's balance of payments. The balance of payments is expected to maintain surplus positions in the balance of trade and the capital and financial account. Despite this, the trade surplus is estimated slightly lower than originally predicted due to the effect of sharply rising imports in line with improvement in the domestic economy. Key to the capital and financial account surplus are rising capital inflows buoyed by positive foreign investor perceptions of the outlook for Indonesia's economy. Following these developments, the international reserves position at 30 July 2010 reached USD78.8 billion, equivalent to 6.03 months of imports and servicing of official external debt. This helped the rupiah maintain stable movement throughout July 2010 with an appreciating trend.

Regarding prices, the Board of Governors is closely monitoring the onset of rising inflationary pressure. July 2010 recorded fairly brisk CPI inflation at 1.57% (mtm) or 6.22% (yoy). Inflationary pressure was driven mainly by higher inflation in the foodstuffs category and particularly rice, due to seasonal uncertainties. In contrast, pressure from core inflation has been kept at modest levels as a result of adequate supply-side response to increases in demand and the appreciating trend in the exchange rate. Accordingly, the Board of Governors believes that the most important factors in mounting inflation are seasonal, requiring action to safeguard against increased expectations of future inflation.

Financial system stability is strong, bolstered by the robust condition of the banking sector. In the view of the Board of Governors, the stable condition of the financial sector is supported by the strength of the banking system in addressing various risks, as well as improvement in the bank intermediation function. Indications of this include the high capital adequacy ratio (CAR) for the banking system, currently at 17.4%, and subdued level of non-performing loans (NPLs) gross at below 5.0%. Improvement in banking intermediation is reflected in the rate of credit expansion at end-July 2010, recorded at 19.6% (yoy). Looking forward, the Board of Governors will keep a close watch on this bank lending growth to keep it within the lending range envisaged in the Bank Business Plans, particularly regarding credit for productive purposes, and is commensurate with supply-side growth in the economy. The purpose of these measures is to ensure that demand-side increase will be adequately offset on the supply-side and thus not generate excessive inflationary pressure.

Bank Indonesia will reinforce the necessary measures for curbing inflationary pressure, including more robust coordination with the central government and regional administrations. In this regard, the Board of Governors places great importance on measures to bolster the effectiveness of monetary policy in managing excess liquidity. Bank Indonesia is pursuing these measures in support of the inflation target for 2010 and 2011, set at 5%±1%.

A complete report on the deliberations of the 4 August 2010 Board of Governors’ Meeting, presenting macroeconomic developments and monetary policy, is presented in the Monetary Policy Review (MPR) on the Bank Indonesia website (www.bi.go.id/web/id/Publikasi).

Jakarta, 4 August 2010
Office of the Governor

Dyah N.K. Makhijani
Director

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