The Indonesia economy is still weathering the spillover effects of the global financial crisis. The fallout from the world economic downturn has borne down on the economic performance of Indonesia with impact exceeding original forecasts. Recent weeks have seen a realignment in various domestic macroeconomic indicators. The Indonesian economy is moving towards a new equilibrium. In regard to inflation, the slowing world economy will inevitably soften inflationary pressure from international prices for goods. For the most part, domestic inflationary pressure is easing. Nevertheless, Bank Indonesia is keeping a watch on future inflation risks that call for close monitoring. Faced with these conditions, Bank Indonesia stands by the importance of maintaining an appropriate monetary policy to strike a balance between achievement of the inflation target and medium and long-term economic stability.
Various economic indicators show that the global economic crisis has spread to Indonesia, affecting domestic economic performance. Economic growth is predicted to decline. Household consumption is forecasted to see slowing growth in tandem with weakening investment due to loss of external demand and the mounting risks from uncertainties in the world economy. Export growth is also predicted to enter a sluggish phase, while import growth will plateau. On the supply side, the key growth sectors of agriculture and industry are expected to chart reduced growth compared to the preceding quarter. However, the growth outlook for some sectors, such as transport and telecommunications and electrical power, remains strong.
Amid these multifaceted developments, inflation has remained the principal area of concern for Bank Indonesia. The various policies pursued by Bank Indonesia are directed at mitigating inflationary pressure in the medium to long term. Inflation in October 2008 reached 11.77% (yoy), down from the preceding month. Inflation eased mainly in response to lower volatile foods inflation and a deflationary contribution in the administered prices category. On the fundamentals side, slowing domestic demand and reduced pressure from imported inflation eased pressures in core inflation. Even so, Bank Indonesia is keeping a close watch on demand-pull pressures in inflation and the continued high credit expansion in the banking system. After taking account of the various factors containing inflationary pressure and mitigating risks, Bank Indonesia still predicts CPI inflation at end-2008 in the 11.5%-12.5% range.
During October 2008, the rupiah exchange rate underwent depreciation. Global sentiment has led to a shift among foreign investors to risk aversion. In the natural course of events, the outbreak of the global crisis has prompted investors to move their portfolios out of Indonesia, setting off a wave of capital outflows. Despite the still healthy condition of Indonesia’s fundamentals, this behaviour has triggered a weakening in the rupiah. In this, Indonesia is far from alone. Currencies across the region have been hit by exchange rate losses. Everywhere, the cause is the same: the spillover effect of global sentiment. Calculated as an average, the rupiah slipped 6.5% during October 2008 to a level of Rp 9,998 per USD. On the stock market, the Indonesian Composite Index also took significant battering from the contagion of the global financial crisis. Nevertheless, for the month as a whole, stock investors continued to book a net purchase.
In the face of the havoc wreaked by the global crisis, the Indonesian banking system remains in predominantly solid condition. Key banking indicators reflect strong resilience in the face of the world financial turmoil. Banking liquidity, which had tightened up in the early days of the crisis, is now more readily available. The various policies pursued by the Government and Bank Indonesia, such as relaxation of the reserve requirement, have contributed to increased banking liquidity on financial markets. This has afforded banks greater room for manoeuvre in conducting their business.
Following this varied developments, the Board of Governors’ Meeting convened on 6 November 2008 decided to hold the BI Rate at 9.5%. Besides employing the BI Rate, Bank Indonesia is optimising the use of all monetary instruments at its disposal, such as the Open Market Operations (OMOs), while maintaining stability on the interbank and forex markets. Monetary policy transmission will operate through movement in interest rates linked to the interbank money market rate, which represents the operational target of monetary policy.
Looking ahead, Bank Indonesia will maintain a close watch on emerging global risks that may influence inflationary pressure and macroeconomic stability. To this end, Bank Indonesia will keep working in close coordination with the Government to maintain a close watch on developments and outlook in the global, regional and domestic economy in order to secure medium and long-term economic stability.
Source: http://www.bi.go.id/NR/rdonlyres/A2C5FDE2-4C0D-486B-8317-8A3F03EBDF38/15108/MPRNovember2008.pdf
Various economic indicators show that the global economic crisis has spread to Indonesia, affecting domestic economic performance. Economic growth is predicted to decline. Household consumption is forecasted to see slowing growth in tandem with weakening investment due to loss of external demand and the mounting risks from uncertainties in the world economy. Export growth is also predicted to enter a sluggish phase, while import growth will plateau. On the supply side, the key growth sectors of agriculture and industry are expected to chart reduced growth compared to the preceding quarter. However, the growth outlook for some sectors, such as transport and telecommunications and electrical power, remains strong.
Amid these multifaceted developments, inflation has remained the principal area of concern for Bank Indonesia. The various policies pursued by Bank Indonesia are directed at mitigating inflationary pressure in the medium to long term. Inflation in October 2008 reached 11.77% (yoy), down from the preceding month. Inflation eased mainly in response to lower volatile foods inflation and a deflationary contribution in the administered prices category. On the fundamentals side, slowing domestic demand and reduced pressure from imported inflation eased pressures in core inflation. Even so, Bank Indonesia is keeping a close watch on demand-pull pressures in inflation and the continued high credit expansion in the banking system. After taking account of the various factors containing inflationary pressure and mitigating risks, Bank Indonesia still predicts CPI inflation at end-2008 in the 11.5%-12.5% range.
During October 2008, the rupiah exchange rate underwent depreciation. Global sentiment has led to a shift among foreign investors to risk aversion. In the natural course of events, the outbreak of the global crisis has prompted investors to move their portfolios out of Indonesia, setting off a wave of capital outflows. Despite the still healthy condition of Indonesia’s fundamentals, this behaviour has triggered a weakening in the rupiah. In this, Indonesia is far from alone. Currencies across the region have been hit by exchange rate losses. Everywhere, the cause is the same: the spillover effect of global sentiment. Calculated as an average, the rupiah slipped 6.5% during October 2008 to a level of Rp 9,998 per USD. On the stock market, the Indonesian Composite Index also took significant battering from the contagion of the global financial crisis. Nevertheless, for the month as a whole, stock investors continued to book a net purchase.
In the face of the havoc wreaked by the global crisis, the Indonesian banking system remains in predominantly solid condition. Key banking indicators reflect strong resilience in the face of the world financial turmoil. Banking liquidity, which had tightened up in the early days of the crisis, is now more readily available. The various policies pursued by the Government and Bank Indonesia, such as relaxation of the reserve requirement, have contributed to increased banking liquidity on financial markets. This has afforded banks greater room for manoeuvre in conducting their business.
Following this varied developments, the Board of Governors’ Meeting convened on 6 November 2008 decided to hold the BI Rate at 9.5%. Besides employing the BI Rate, Bank Indonesia is optimising the use of all monetary instruments at its disposal, such as the Open Market Operations (OMOs), while maintaining stability on the interbank and forex markets. Monetary policy transmission will operate through movement in interest rates linked to the interbank money market rate, which represents the operational target of monetary policy.
Looking ahead, Bank Indonesia will maintain a close watch on emerging global risks that may influence inflationary pressure and macroeconomic stability. To this end, Bank Indonesia will keep working in close coordination with the Government to maintain a close watch on developments and outlook in the global, regional and domestic economy in order to secure medium and long-term economic stability.
Source: http://www.bi.go.id/NR/rdonlyres/A2C5FDE2-4C0D-486B-8317-8A3F03EBDF38/15108/MPRNovember2008.pdf
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