Bank Indonesia Lowers BI Rate 50 bps to 10.25%
Today, Tuesday November 7, 2006, Board of Governor’s Meeting at Bank Indonesia decided to lower the BI Rate a further 50 bps from 10.75% to 10.25%. This decision was taken after an in-depth discussion that evaluates the current development and outlook of overall macroeconomic conditions, examines the findings from consumer and producer surveys, and assesses the outlook for the domestic and global economy.
The board decision is based primarily on strong indications of sustained economic recovery alongside continued macroeconomic stability. Initial macroeconomic indicators for Q4/2006 point to rising economic growth driven by continued expansion in net exports and consumption. This is matched by growing optimism among producers and consumers. CPI inflation in October 2006 maintained a downward trend, easing to 6.29% (y-o-y) with cumulative inflation for the year at only 4.96% (y-t-d). Core inflation moved lower to 6.86% (yoy) in October 2006, hovering around its post crisis (2002-2005) average of 7% (yoy). In view of the inflation recorded in October 2006, BI believes that the impact of the fuel price hikes in 2005 has been contained and monetary policy has successfully mitigated the second-round effects on public inflation expectations. Exchange rate volatility in October was subdued in response to stable yields on rupiah placements, declining risk and reduced pressure from global interest rate hikes.
In the assessment of the Board of Governors, economic agents have so far responded positively to the reductions in the BI Rate. On the stock market, the JSX Index recorded yet further gains from foreign capital inflows driven by positive perceptions of the impact of the interest rate cut on the economic outlook. Share prices were up across all categories of stocks. Positive perceptions were also evident on the government bond market, as reflected in the declining yield on government securities even in spite of reduced foreign holdings. Bank lending has also seen more vigorous expansion since August 2006. Credit expansion in September 2006 reached Rp 18.5 trillion, the highest monthly growth in 2006 so far, bringing cumulative expansion for the year to 7.9% (y-t-d). NPLs gross and net fell to 8.5% and 4.9% from the August 2006 positions of 8.8% and 5.0%. In the real sector, the signalled reduction in the BI Rate has stimulated consumer confidence and producer optimism for improvement in the economy. The declining movement in the BI Rate also supports efforts by business to seek more economically priced alternative forms of non-bank financing through the asset price channel.
Nevertheless, the Board of Governors is cognizant of some economic concerns calling for vigilance in the months ahead. Expansion in production capacity is reportedly moving slowly, despite some improvement. As a result, the overall supply side in the economy remains below the desired level. At the same time, there are indications of a downward trend in world commodity prices and a mounting trend in consumer goods imports that could affect Indonesia's balance of payments. In regard to financing, reductions in bank lending rates in response to the lower BI Rate are generally marked by a time delay related to the resolution of NPLs and internal processes at individual banks.
Some indications also point to continued inflationary pressure in 2007. Reflecting this is core inflation, the persistent component of CPI inflation that remains high in the absence of significant decline from the historical post-crisis level. The predicted source of inflation is economic growth that is inadequately balanced by expansion in the capacity to supply and infrastructure development, even though the overall economy has entered the expansionary phase.
In view of the above balance of risks, going forward, the Board of Governors also sees the need for a more measured and cautious pace of monetary policy, to ensure the stability of macroeconomic condition in the medium and long-term and strengthen the momentum for sustainable economic recovery.
Jakarta, 7 November 2006
Directorate of Strategic Planning
and Public Relations
source : Bank Indonesia