Official Press Release of Bank Indonesia: BI Rate up 25 bps to 7.25%

Measures to stabilize the rupiah in line with prevailing economic fundamentals will continue, underpinned by efforts to strengthen monetary operations and deepen the foreign exchange market. Bank Indonesia will also redouble efforts to enhance coordination with the Government and the FKSSK in order to maintain macroeconomic and national financial system stability, particularly in terms of controlling inflation, stabilizing financial markets as well as reducing the current account deficit and ensuring a sound balance of payments. Bank Indonesia is of the opinion that the aforementioned policies, accompanied by the array of policies implemented previously, will expedite reductions in the current account deficit and bring the rate of inflation down to its target corridor of 4.5±1% in 2014.

Bank Indonesia predicts that the global economic slowdown and financial uncertainty will persist. Global economic growth is expected to slow to 3.0% in 2013 compared to 3.1% previously as a result of lukewarm growth in emerging markets, especially India and China. International commodity prices will continue to slide, excluding the price of oil. Meanwhile, vigilance is required regarding uncertainty linked to the tapering policy introduced by the Fed as well as potential shifts in the direction of the global economy. In 2014, Bank Indonesia projects the global economy to grow by 3.5%, lower than the previous projection of 3.7%.

Bank Indonesia revised down its projection for domestic economic growth in 2013 to 5.5-5.9% from 5.8%-6.2% previously. Domestically, the economic slowdown is evidenced by a number of surveys conducted by Bank Indonesia, like the Retail Sales Survey and the Consumer Confidence Survey, which indicate that household consumption will tend to decelerate during the second semester of the current year. Several investment indicators, like imports of capital goods, heavy equipment sales and electricity consumption in the manufacturing sector, all confirm that non-construction investment will suffer a contraction in semester II-2013. Externally, real exports are expected to improve amid lower export commodity prices from Indonesia. Looking forward, Bank Indonesia has also revised its economic growth projection for 2014 down from 6.0-6.4% previously to 5.8%-6.2% in harmony with the weaker global economic outlook.

Indonesia’s balance of payments is predicted to improve based on a smaller oil and gas trade deficit, subsequent to running a large deficit in July 2013 due to large-scale imports of oil and gas as buffer stock to offset demand during the religious holiday of Idul Fitri. Such conditions, which are gradually eroding the current account deficit, are expected to endure, thereby reducing the deficit further compared to quarter II-2013. A smaller current account deficit is also affected by weaker domestic demand as well as various policies introduced to suppress imports. Meanwhile, the capital and financial accounts are estimated to run a surplus, buoyed by inflows of foreign direct investment (FDI) and portfolio investment, deemed adequate to offset the current account deficit. Bank Indonesia assesses the private foreign debt position as relatively sound thanks to generous support from long-term debt dominated by export-oriented firms. Foreign exchange reserves at the end of August 2013 totaled US$93.0 billion, noticeably stable from the previous position at the end of July 2013 amounting to US$92.7 billion. Foreign exchange reserves at the end of August were equivalent to 5.0 months of imports and servicing government foreign debt.

The rupiah exchange rate gradually stabilized and the interbank Forex market rebounded. Up to the end of August 2013, dogged pressures on the rupiah persisted, closing at a level of IDR 10,920 per US dollar, thereby depreciating 5.8% compared to the position at the end of July 2013 or 11.7% compared to year end 2012. Recently, the rupiah has gradually stabilized and was traded at around IDR 11,350 - IDR 11,515 per US dollar on 11th September 2013. Bank Indonesia considers recent movements in the rupiah as consistent with prevailing economic fundamentals that support an escalation in exports and fewer imports congruous with the current account deficit adjustment process. Bank Indonesia will continue to run necessary means to stabilize the Rupiah exchange rate, according to its fundamental condition.

Inflationary pressures eased in August 2013 following a spike in the preceding month. The rate of inflation was 1.12% (mtm) in August 2013 or 8.79% (yoy), representing a steep decline from the previous month at 3.29% (mtm) or 8.61% (yoy). Bank Indonesia expects inflationary pressures to continue to dissipate, with a low level of inflation predicted in September 2013. The prospect of less intense inflationary pressures is also subject to the impact of weaker domestic demand as well as measures to strengthen policy coordination between Bank Indonesia and the Government in terms of inflation control. Consequently, the rate of inflation in 2013 is projected in the range of 9.0% - 9.8%, subsequently declining thereafter to 4.5±1% in 2014.

Financial system stability continues to be well maintained, bolstered by tenacious banking industry resilience. Amid downward economic trends and rupiah depreciation, banking industry resilience remains solid, as reflected by a Capital Adequacy Ratio (CAR) of 18%, well above the minimum requirement of 8%, as well as the low ratio of gross Non-Performing Loans (NPL) at just 1.9% in July 2013. Concomitantly, the expansive credit growth in July 2013 at 22.3% (yoy) eased off to 22.0% (yoy) in August 2013. In addition to the base effect, this growth is partly a realization of existing commitments. Bank Indonesia will continue its supervisory actions to make sure that credit growth is consistent to the economic development, as well as supporting stability in the banking industry and financial system.

The report of the RDG meeting held in September 2013, reviewing macroeconomic performance and monetary policy, is available in full under the Monetary Policy Review posted on the official website of Bank Indonesia.

Jakarta, 12 September 2013
Communication Department

Difi A. Johansyah
Executive Director

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