The central bank of Indonesia (Bank Indonesia, or BI) decided to maintain its record low policy rate for the 15th straight month at 5.75 percent as it is considered consistent with its inflation target range of 3.5-5.5 percent in 2013 and 2014. The central bank also stated that the global economic recovery is accompanied by many uncertainties which result in a lower forecast for Indonesia's economic growth. The full press release of Bank Indonesia can be read below.
No. 15/ 9 /PSHM/Humas
In the Board of Governors' Meeting convened on April 11th, 2013, Bank Indonesia decided to hold the BI-Rate at 5.75%. The current policy rate is considered consistent with inflation target range of 4.5% ±1% in 2013 and 2014. As we observed rising short term inflation pressure of food prices (volatile foods) recently and continued pressure on the external balance, Bank Indonesia will strengthen monetary operations through increasing the absorption of excess liquidity into long-term tenor. Bank Indonesia stays vigilant on various risks of inflationary pressure and will adjust monetary policy response as needed. Exchange rate stabilization policy in line with its fundamentals that have been done will be continued, strengthened by accelerating efforts to deepen the foreign exchange market. Bank Indonesia will also strengthen coordination with the Government to focus on cutting down the current account deficit and minimize the potential for inflationary pressure from volatile foods, including the horticulture import policy.
The global economic recovery was not as good as previously forecasted and still overshadowed by uncertainty. The fiscal problem is expected to restrain the US economic growth, although its production and consumption began to show an improvement. On the other hand, the European economic recession continues due to slow progress on the austerity programs implementation in several countries. On the contrary, some Asian economies showed different conditions, especially China, which improved as reflected in indicators of consumption and production. Global commodity prices still tend to decline, except for the oil price. Accordingly, the central banks’ policy response is in general still accommodative by maintaining low interest rates and quantitative easing.
Indonesia's economic growth in 2013 is expected to be at 6.2%-6.6% lower than the previous forecast 6.3%-6.8%. In Q2-2013, economic growth is forecasted to reach 6.2%, relatively equal to the previous quarter. Domestic demand is still growing quite strongly, although moderated, amid economic growth amelioration in the external side. Strong private consumption supported by improved purchasing power and consumer confidence. Meanwhile, in the midst of strong construction investment, non-construction investment tends to slow down. On the other hand, the export volume has increased in line with economic recovery in some of the major trading partner countries, especially China. National economic growth is also supported by the high growth projection in the regional economies and is more evenly distributed. For the year 2014, in line with domestic demand that remains strong and an improving global economy, economic growth is expected to reach 6.6%-7.0%, but lower than the previous forecast of 6.7%-7.2%.
Externally, Indonesia's balance of payments (BOP) in Q2-2013 is forecasted to post a lower deficit than the previous quarter due to improvements in the capital and financial account (TMF). The improvement was primarily driven by increasing portfolio investment, including global bonds issuance by the Government, in line with strong economic fundamentals and the impact of global economic policy that is still accommodative. However, the current account deficit is expected to increase mainly because imports are still quite high, partly linked to high fuel consumption. International reserves by the end of March 2013 reached USD $104.8 billion, or equivalent to 5.7 months of imports and government’s external debt service, above the adequacy level of international standards.
The exchange rate of the rupiah underwent depreciation pressure in the Q1-2013, though more moderate in line with continued capital inflows. This is the result of Bank Indonesia’s policy in maintaining exchange rate stability in line with its fundamentals by strengthening foreign exchange intervention mechanism and implementing foreign exchange term deposit (TD), as well as foreign exchange market deepening. On average, the rupiah depreciated 0.7% (qtq) to IDR 9.680 per US dollar with contained volatility. Going forward, and taking into account the condition of balance of payments in the Q2-2013, the exchange rate depreciation pressure is expected to moderate.
The fluctuation in the volatile food prices led to a high CPI inflation in March 2013. CPI inflation reached 0.63% (mtm) or 5.90% (yoy), above its historical average. High volatile foods inflation recorded at 2.44% (mtm) or 14.20% (yoy), especially shallots, garlic and chili due to supply disruptions related to import policy adopted by the Government. On the other hand, core inflation remained stable at 4.21% (yoy) in line with contained public’s inflation expectation and adequate production capacity. Going forward, inflationary pressures are expected to subside in line with government measures to overcome food supply disruption and the arrival of the harvest season. Strengthened coordination measures to control inflation through Inflation Control Team at the central level (TPI) and in the regions (TPIDs) are in progress.
The financial system stability and banking intermediation function are properly maintained. A solid banking industry performance is reflected in the high capital adequacy ratio (CAR), which is well above the minimum 8% and the maintained ratio of non-performing loans (NPL) gross below 5%. Meanwhile, credit growth until the end of February 2013 reached 23.4% (yoy), higher than the previous month. Working capital and investment credits grew quite high at 24.5% (yoy) and 25.4% (yoy), respectively. Meanwhile, consumer credit grew 20.3% (yoy). Going forward, Bank Indonesia believes that the financial stability will be maintained with improvement in the banking intermediary function in line with the increase in Indonesia’s economic performance.
Jakarta, April 11, 2013
Office of the Governor