Persistently high inflationary pressure in Indonesia during August 2008 was fuelled mainly by brisk expansion in aggregate demand. At the same time, pressure from high world market prices for energy, foodstuffs and commodities began to ease, although still demanding close vigilance. In response, Bank Indonesia sees the need to curb aggregate domestic demand within safe limits for achievement of the medium-term inflation target and economic stability in general.
The latest economic indicators point to rapid growth in aggregate demand fuelled by exports and private consumption. Investment has also forged ahead of the historical average. Robust domestic demand has fuelled soaring import growth, especially for raw materials and capital goods. In the medium to long-term, this import growth portends to benefit domestic economic growth. On the other hand, the Indonesian economy is daunted by the escalated risks in the global economy reflected in the persistent instability in global financial market conditions, slowing world economic growth and ongoing uncertainty in commodity prices. The global and domestic turbulence will strongly influence the outlook for Indonesia's economic growth and inflation in 2008 and 2009.
Within the broad constellation of economic developments, inflation will remain the primary focus of Bank Indonesia. In the implementation of its policy, Bank Indonesia is targeting actions to curb inflation. Inflation in August 2008 reached 0.51% (mtm), down considerably from 1.37% (mtm) in the preceding month with annual inflation recorded at 11.85% (yoy).
Accordingly, inflation for January-August 2008 to 9.40%, well above the 3.58% charted for the same period one year earlier. Analysed by influencing factors, the sustained high CPI inflation is driven primarily by non-fundamentals linked mainly to high volatile foods inflation. On the other hand, administered prices inflation was down with the diminishing impact of the hike in subsidised fuel prices and the minimum impact of the increase in bottled LPG prices. After factoring of the various risks and inflationary pressure looming to the end of the year, Bank Indonesia predicts CPI inflation at end-2008 in the range of 11.5%-12.5% (yoy).
In August 2008, the exchange rate maintained upward movement, despite slight weakening at the end of the month. The rupiah came under temporary pressure from external jitters over the impact of the global economic slowdown and fluctuation in commodity prices on economic resilience. Bank Indonesia took actions to stabilise the exchange rate to mitigate excessive volatility on the foreign exchange market.
In the Board of Governors' Meeting convened in September 2008, Bank Indonesia raised the BI Rate by a further 25 bps from 9.00% to 9.25% in the fifth such rate increase since May 2008. In addition to raising the BI Rate, Bank Indonesia will move forward with optimising the use of all monetary instruments at its disposal, such as use of Open Market Operations and stabilisation measures on the rupiah and forex money markets. The contractionary measures in Open Market Operations included an increase in the FASBI short-term deposit facility rate from 300 bps below the BI rate to 200 bps below the BI Rate.
Monetary policy transmission was reflected in across the board increases in all rates linked to the BI Rate. Since June 2008, the Overnight Interbank Rate, set as the operational target for monetary policy, has held stable at about the BI Rate. The overnight FASBI rate, which comprises the floor for movement in the overnight interbank rate, climbed to 7.25% from the previous 6%. In similar movement, the SBI Repo rate, representing the ceiling on O/N interbank rates, mounted to 12.25%. These interest rate movements were subsequently transmitted to deposit and lending rates in the national banking system. So far, transmission of the increases in the BI Rate to the financial market has operated smoothly.
However, on the stock market, relentless pressure on global financial markets dragged down the Indonesian Composite Index (IDX Composite) during August 2008. The IDX index losses resulted mainly from external turbulence arising from the major issues on global stock markets. Despite this, the IDX index was held back from further decline by the sustained
strength of domestic fundamentals.
Looking ahead, the Board of Governors of Bank Indonesia will continue to focus on mitigation of pressures on macroeconomic stability. The Board also envisages further actions to manage levels of demand while taking account of the impact of these actions on domestic economic growth. With the support of integrated policy, Bank Indonesia is confident that inflation in 2009 can be brought to within the 6.5%-7.5% range.
Source:http://www.bi.go.id/NR/rdonlyres/2A33C7DE-8E10-444F-AAFF-97B5781A8B19/14612/MPRSeptember2008.pdf
The latest economic indicators point to rapid growth in aggregate demand fuelled by exports and private consumption. Investment has also forged ahead of the historical average. Robust domestic demand has fuelled soaring import growth, especially for raw materials and capital goods. In the medium to long-term, this import growth portends to benefit domestic economic growth. On the other hand, the Indonesian economy is daunted by the escalated risks in the global economy reflected in the persistent instability in global financial market conditions, slowing world economic growth and ongoing uncertainty in commodity prices. The global and domestic turbulence will strongly influence the outlook for Indonesia's economic growth and inflation in 2008 and 2009.
Within the broad constellation of economic developments, inflation will remain the primary focus of Bank Indonesia. In the implementation of its policy, Bank Indonesia is targeting actions to curb inflation. Inflation in August 2008 reached 0.51% (mtm), down considerably from 1.37% (mtm) in the preceding month with annual inflation recorded at 11.85% (yoy).
Accordingly, inflation for January-August 2008 to 9.40%, well above the 3.58% charted for the same period one year earlier. Analysed by influencing factors, the sustained high CPI inflation is driven primarily by non-fundamentals linked mainly to high volatile foods inflation. On the other hand, administered prices inflation was down with the diminishing impact of the hike in subsidised fuel prices and the minimum impact of the increase in bottled LPG prices. After factoring of the various risks and inflationary pressure looming to the end of the year, Bank Indonesia predicts CPI inflation at end-2008 in the range of 11.5%-12.5% (yoy).
In August 2008, the exchange rate maintained upward movement, despite slight weakening at the end of the month. The rupiah came under temporary pressure from external jitters over the impact of the global economic slowdown and fluctuation in commodity prices on economic resilience. Bank Indonesia took actions to stabilise the exchange rate to mitigate excessive volatility on the foreign exchange market.
In the Board of Governors' Meeting convened in September 2008, Bank Indonesia raised the BI Rate by a further 25 bps from 9.00% to 9.25% in the fifth such rate increase since May 2008. In addition to raising the BI Rate, Bank Indonesia will move forward with optimising the use of all monetary instruments at its disposal, such as use of Open Market Operations and stabilisation measures on the rupiah and forex money markets. The contractionary measures in Open Market Operations included an increase in the FASBI short-term deposit facility rate from 300 bps below the BI rate to 200 bps below the BI Rate.
Monetary policy transmission was reflected in across the board increases in all rates linked to the BI Rate. Since June 2008, the Overnight Interbank Rate, set as the operational target for monetary policy, has held stable at about the BI Rate. The overnight FASBI rate, which comprises the floor for movement in the overnight interbank rate, climbed to 7.25% from the previous 6%. In similar movement, the SBI Repo rate, representing the ceiling on O/N interbank rates, mounted to 12.25%. These interest rate movements were subsequently transmitted to deposit and lending rates in the national banking system. So far, transmission of the increases in the BI Rate to the financial market has operated smoothly.
However, on the stock market, relentless pressure on global financial markets dragged down the Indonesian Composite Index (IDX Composite) during August 2008. The IDX index losses resulted mainly from external turbulence arising from the major issues on global stock markets. Despite this, the IDX index was held back from further decline by the sustained
strength of domestic fundamentals.
Looking ahead, the Board of Governors of Bank Indonesia will continue to focus on mitigation of pressures on macroeconomic stability. The Board also envisages further actions to manage levels of demand while taking account of the impact of these actions on domestic economic growth. With the support of integrated policy, Bank Indonesia is confident that inflation in 2009 can be brought to within the 6.5%-7.5% range.
Source:http://www.bi.go.id/NR/rdonlyres/2A33C7DE-8E10-444F-AAFF-97B5781A8B19/14612/MPRSeptember2008.pdf
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