Title BI Rate raised 25 bps to 6.75%

No. 13 /03/ PSHM / Humas

In the Board of Governor’s Meeting convened on 4 February 2011, Bank Indonesia decided to increase the BI Rate by 25 basis points (bps) or 0.25% to 6.75%.  This decision represents an anticipatory measure to curb the renewed onset of increased inflation expectations .  The rise in inflation expectations has been triggered primarily by further steep increases in volatile food prices, in addition to the escalating prices for globally-traded commodities, including oil, and Government policy planning for strategic commodities. Bank Indonesia will keep a close watch on future inflation developments and strengthen the rupiah exchange rate policy in line with measures to curb future inflationary pressures in addition to the macroprudential policies introduced in 2010. With this monetary and macroprudential policy mix and Government actions to bring down high food commodity prices, the Board of Governors is confident that inflation can be curbed in line with the target of 5% ±1% for 2011 for 2011 and 4.5% ±1% for 2012.

The outlook for the world economy is one of continued improvement ahead of earlier forecasts. This trend reinforces the confidence of the Board of Governors in the outlook for the Indonesian economy, with growth for 2011 forecasted in the 6.0%-6.5% range.  Q1/2011 growth is predicted to reach 6.4% on the strength of buoyant domestic demand and external sector improvements.  Exports will maintain vigorous growth in line with the global economic recovery. Imports are also set to climb, particularly for capital goods needed to support capacity expansion in the economy. Accordingly, the current account is again forecasted to post a considerable surplus in Q1/2011. The capital and financial account is also predicted to chart a sizeable surplus in response to heavy inflows of capital for direct investment (FDI). Taken together, the Indonesia balance of payments is again forecasted to achieve respectable surplus in Q1/2011.  International reserves at 31 January 2011 were recorded at USD95.3 billion, equivalent to 6.3 months of imports and servicing of official debt.

The rupiah sustained some pressure from capital outflows. The rupiah weakened while charting increased volatility, a development sparked among others by market jitters over rising inflationary pressure. During January, the rupiah exchange rate fell by an average 0.1% to Rp 9,034 to the USD. The Board of Governors is confident that the capital outflows and rupiah depreciation are more of a temporary nature in view of the strength of Indonesia's economic fundamentals as attested by the decision by the Moody's rating agency to boost Indonesia's sovereign credit rating to Ba1 with outlook stable.  Furthermore, Bank Indonesia policies aimed at exchange rate stabilisation helped to restore the stability of the rupiah.

The Board of Governors is keeping a close watch on a renewed increase in inflation expectations. CPI inflation in January 2011 reached 0.89% (mtm) or 7.02% (yoy). The high rate of inflation is explained primarily by high volatile foods inflation running at 18.25% (yoy) as a result of further crop losses and disruptions in distribution of rice and seasonings. However, administered prices charted moderate inflation at 5.21% (yoy), while core inflation is relatively subdued at a mild 4.18% (yoy). Despite this, inflation expectations have begun to climb as reflected in indicators for the inflation expectations in the Consumer Expectations Survey, Producers Survey and prices for financial assets.  While triggered by the steep increases in volatile food prices, the surge in inflation expectations has also come in response to rising global commodity prices and the Government plan to reduce the fuel subsidy. The Board of Governors believes that the rising inflation expectations call for an appropriate response to avert future inflationary pressures.

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) gross at below 5%. Further improvement in banking intermediation is also reflected in progressively improving credit growth, recorded in 2010 at 22.8% (yoy) on the strength of expansion in all lending categories including credit to MSMEs. 

The Board of Governors stresses the importance of measures to strengthen policy coordination with the Government. To curb the risk of future inflationary pressure still expected from crop losses and problems in the distribution of food and energy commodities, further measures will be introduced to stabilise prices with support from Government policy through the Inflation Control Team at the central level (TPI) and in the regions (TPIDs). 

The complete report of the deliberations of the Board of Governors’ Meeting for February 2011, featuring macroeconomic and monetary policy developments, will be presented in the Monetary Policy Review (MPR) on the Bank Indonesia website.
Jakarta, 4 February 2011
Office of The Governor

Difi A. Johansyah