The Meeting of the Board of Governors (Rapat Dewan Gubernur - RDG) of Bank Indonesia on 5th August 2008 has decided raise BI Rate by 25 bps to 9.0%. This decision was aimed at securing the stability of Indonesian economy and financial system, particularly to support the achievement of mid-term inflation.
"Bank Indonesia still foresees the risk of pressure on inflation from the movements of the world oil and food prices, as well as domestic demand", BI Governor Boediono announced after the Meeting. The perceivably high risk against inflation was a key factor of BI's decision to raise BI Rate this month. However, the impact of fuel price increase on inflation has declined significantly. In order to make monetary policy more effective, other monetary instruments such as the control over exchange rate volatility and the absorption of excess liquidity through Open Market Operations (OMO) were utilized alongside the strategy to raise BI Rate. With this integrated strategy, BI expects that the inflation target in the range of 6.5% -7.5% for 2009 will be achieved.
BI Rate increase of 25 bps in August 2008 is predicted not to cause any major disruption to Indonesian economy as various indicators indicate strong domestic demand. The banking industry remains strong and is supported by the good ability to conduct intermediary function. Banks lending still grew by 31.6% (yoy), with gross NPL ratio fell to 4.08%. Additionaly, the sales of motor vehicles and cement are still soaring. Indonesian economy in 2008 is predicted to continue to grow, with contributing factors such as considerably high export growth, public consumption and government spending. Domestic demand will also be supported by higher regional government spending and the preparation of general election of 2009.
The monthly inflation in July 2008 was recorded at 1.37%, driving annual inflation to 11.90% - representing an increase from 11.03% of the previous month. This has led to January-July 2008 inflation to reach 8.85%, much higher than the inflation of the same period in the previous year (2.72%). Taking into account a number of risk and inflation factors predicted to arise until end-of-year, Bank Indonesia has forecasted that CPI inflation at the end of 2008 will fall in the range of 11.5% -12.5% (yoy). Meanwhile, Indonesian Balance of Payments is forecasted to improve and result is good exchange rate stability. Foreign currency reserves as of the end of July 2008 were recorded USD60.56 billion, or equivalent to 4.7 months of imports and the Government's foreign debt payments.
The Board of Governors will continue to evaluate the prospect of economic and inflation development using the latest information in order to execute the best monetary policies going forward.
(FDT: BI Press Release on http://www.bi.go.id/web/id/Ruang+Media/Siaran+Pers/sp_103808.htm)