Bank Indonesia Alerted to Heightened Inflation Risk - Bank Sentral Republik Indonesia
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April 18, 2019
No. 13/01/PSHM/Humas

In the Board of Governors' Meeting convened on 5 January 2011, Bank Indonesia has decided to hold the BI Rate at 6.5%. Nevertheless, the Board is alerted to an escalating trend in future inflationary pressure related to disruptions in supply of volatile foods and possible increases in administered prices. Concerning this, Bank Indonesia believes that any rise in inflation expectations can be kept to a minimum level if steps are taken to improve effectiveness in production, distribution and availability of staple goods both at the national and regional levels. From the side of Bank Indonesia, the monetary and macroprudential policy mix introduced last year will be reinforced through balanced and measured optimisation of all instruments in use. BI has launched a range of policies aimed at curbing liquidity and capital inflows, including an increase in the statutory reserve requirement (both rupiah and foreign currency), the ‘one-month holding period’ for Bank Indonesia Certificates (SBIs) and restrictions on banks’ short-term external borrowing.

Global economic recovery has regained momentum, although still overshadowed by the risk of Europe debt crisis. Whilst slowly moving economic recovery in most advanced economies, emerging market economies continue to forge ahead. Furthermore, global commodity prices continue to rise, driven not only by supply-demand factors but also by the migration of investment to commodities markets prompted by the weakening of the US dollar and low investment returns in advanced economies. So far, the policy response by central banks in advanced economies has been to keep interest rates low. In contrast, some emerging market economies have raised their policy rates and introduced policies to manage capital inflows and stabilize exchange rate movement.

Amid the present uncertainty in global economic and financial conditions, the Board of Governors is confident that Indonesia's economic growth in 2010 will reach about 6%. Supporting this is the forecast of fourth quarter growth in 2010 at 6.1%, ahead the preceding quarter. This growth has been bolstered by buoyant domestic demand led by household consumption and investment. The improvement in Indonesia's economy has also benefited from solid external performance. Export growth in Q4/2010 remained strong despite lower as compared to earlier periods while imports also charted a similar trend, thus maintaining a current account surplus. As a result, Indonesia's balance of payments for 2010 as a whole posted a considerable surplus on the back of heavy inflows of capital for foreign direct investment (FDI) and portfolio investments. In response to these developments, international reserves at end-December 2010 reached USD96.2 billion, a level equivalent to 7.1 months of imports and servicing of official external debt.

Against the background of Indonesia's strong external performance, the rupiah underwent further exchange rate appreciation accompanied by low volatility. Point to point; rupiah gained 4.4% (ytd) to Rp 9,010 to the USD with declined volatility. The policies introduced by Bank Indonesia for managing capital inflows and exchange rate stability through forex intervention and accumulation of international reserves have helped engender positive expectations of the domestic economy. Rupiah has undergone relatively mild appreciation compared to other currencies in the region, enabling Indonesia to maintain a competitive position.

In the Board of Governors' opinion, resurgent inflationary pressure in 2010 was driven primarily by mounting prices in the volatile foods category. CPI inflation in December 2010 came to 0.92% (mtm) or 6.96% (yoy). At this level, the CPI inflation outcome surpassed the Government target of 5%±1%. The above-target deviation is explained primarily by high volatile foods inflation running at 17.74% (yoy) as a result of crop losses and disruptions in distribution caused by adverse weather conditions. This sharp rise in volatile foods inflation has also been observed in other countries in the region. In contrast, administered prices have charted only moderate inflation at 5.40% (yoy), while core inflation is subdued at a mild 4.28% (yoy). The low rate of core inflation is explained by a combination of exchange rate appreciation, modest inflation expectations and the present capacity of the economy to satisfy rising demand.

Financial system stability remained secure alongside steady improvement in the banking intermediation function. The solid condition of the banking industry is reflected in the high capital adequacy ratio (CAR) and subdued non-performing loans (NPLs) at below 5%. Further improvement has been recorded in banking intermediation. Credit growth by end of December 2010 recorded at 22.8% which the highest contribution of this growth was lending to MSMEs. Hitherto, the Indonesian banking system has not been impacted by fallout from the debt crisis in Europe. This is explained by the comparatively low exposure of Indonesia's banks to the banking system in European nations.

Looking forward, the Board of Governors is confident of a continued buoyant outlook for the Indonesian economy. GDP growth is forecasted to climb further in 2011 and 2012 to 6.3%, driven mainly by domestic demand and particularly accelerating investment activity. Balance of payments is again predicted to chart a respectable surplus in 2011 albeit lower from 2010. Exports will maintain vigorous growth, but imports are predicted to climb even faster in response to strong domestic demand, resulting in a reduced current account surplus. Nevertheless, the capital and financial account is forecasted to chart another respectable surplus driven by strong inflows of portfolio capital and foreign direct investment (FDI).

On a cautionary note, the Board of Governors expects the resurgent economic activity to be accompanied by mounting inflationary pressure. Inflationary pressure may be fuelled by disruptions in supply of volatile foods and possible increases in administered prices, in addition to rising demand and international commodity prices. Other risks that also call for attention are the surging capital inflows in a situation of considerable excess liquidity. In this regard, BI will take further action to strengthen the monetary and macroprudential policy mix. Current policies on managing liquidity and capital inflows will be subject to ongoing evaluation and if necessary, adjustments will be made to support monetary policy effectiveness.

These measures need to be supported by improved policy coordination with the Government. This is essential to boost supply side response in a situation of future improvement in economic activity and thus avoid generating inflationary pressure. Within this context, the existing cooperation with the government in the Inflation Control Team at the central level (TPI) and in the regions (TPIDs) must be strengthened further through enhancements in the programmes for bolstering the supply side and particularly improving distribution. Bank Indonesia expects and is fully confident that the Government will take proper actions to address these matters. The combination of these efforts and measures offers assurance for curbing inflation within the targeted range of 5%±1% in 2011 and 4.5%±1% in 2012.

The complete report of the deliberations of the Board of Governors’ Meeting for January 2011, featuring macroeconomic and monetary policy developments, will be presented in the Monetary Policy Review (MPR) on the Bank Indonesia website.

Jakarta, 5 January 2011
Office of the Governor

Difi A. Johansyah
Bureau Chief

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