An evaluation of the general performance and outlook for the economy points to overall improvement with Q3/2010 economic growth estimated above Q2/2010 and inflationary pressure from volatile foods and administered prices in decline.
In the opinion of the Board of Governors, the present level of the BI Rate is consistent with achievement of the inflation target and remains conducive to safeguarding financial stability and promoting the necessary banking intermediation for adequate supply-side response to accelerating demand.
Amid the sustained high rate of capital inflows and considerable excess liquidity, the Board of Governors stresses the greater importance of managing economic liquidity. The decision to raise the primary statutory reserve ratio on 1 November 2010 has been implemented smoothly without triggering shocks in banking liquidity.
Looking forward, Bank Indonesia will bolster management of liquidity and effectiveness of monetary policy with a monetary and macroprudential policy-mix to manage foreign capital inflows, stabilise the rupiah exchange rate and assure inflation control in line with the established 5% ± 1% target for 2011.
The Board of Governors notes that global economic recovery remains daunted by uneven progress and shrouded in uncertainty.
In advanced economies, recovery is losing steam, while emerging markets are charting more moderate economic growth. This has potential to diminish external demand for exports from emerging market economies, including Indonesia, even in spite of the upward trend in global commodity prices.
At the same time, foreign capital continues to pour into emerging economies, including Indonesia, driven by the push factors of high levels global liquidity excess and resumption of accommodative monetary policy in advanced economies as well as the pull factors of robust economic fundamentals, high returns and improving perceptions of risk in emerging market economies.
At home, the Board of Governors envisages further acceleration in the rate of economic growth on the back of consumption and rising investment.
Buoyant domestic consumption is supported by a range of factors, including more robust purchasing power, increased support from financing and stronger business and consumer confidence. Alongside this, investment levels are improving in keeping with the launching of policies to support investment activities, improved market perceptions of the economy, increased availability of financing and lower prices for imported capital goods.
In similar developments, exports have maintained buoyant growth strong despite some slowing in comparison to the previous period, bolstered by high levels of growth in trading partners led by China and India. An added factor contributing to rising export growth is the upward trend in commodity prices.
Robust exports and continued high capital inflows have had a positive effect on Indonesia's balance of payments.
Like before, vigorous export growth has contributed to a current account surplus. Similarly, the steady rise in capital inflows driven by higher levels of confidence among international investors in the outlook for the Indonesian economy has produced a surplus in the capital and financial account. As a result, Indonesia's international reserves at end-October 2010 mounted to USD 91.799 billion, equivalent to 6.93 months of imports and servicing of official debt.
Concerning prices, inflationary pressure eased in October 2010 mainly in response to deflation in volatile foods.
CPI inflation was recorded in October 2010 at 0.06% (mtm) or 5.67% (yoy). The low rate of CPI inflation was supported by price corrections in food commodities and transport fares in the wake of the Eid-ul-Fitr festivities. At the same time, only mild inflationary pressure resulted from administered prices, due to the minimal increases announced in government-managed prices.
Core inflationary pressure increased due to the effect of higher international prices, led by gold and granulated sugar. Bank Indonesia continues to see potential for future increases in inflationary pressure fuelled by the sustained upward trend in international commodity prices, the unabated anomalies in weather patterns that pose a threat to production and distribution of staple food and surging demand as the end of the year draws near. In response to these developments, Bank Indonesia remains committed to managing inflation in line with the established targeting range at 5%±1% for 2010 and 2011 and 4.5%±1% for 2012.
Banking industry indicators showed steady improvement alongside prudently managed banking system stability.
Financial sector resilience remained comfortably secure during October 2010, buoyed by conducive macroeconomic conditions. Reflecting this are predominantly high levels of the capital adequacy ratio (CAR) and bank profitability, subdued non-performing loans (NPLs) at below 5% and banking liquidity conditions well under control.
Banking intermediation has also strengthened further, as evident in credit growth at end-October 2010 that reached 21.9% (yoy). At this level, the rate of expansion in bank lending is on track with the Business Plans prepared by banks that project credit expansion in the 22%-24% range. Similarly, credit expansion for the calendar year (ytd) is now positive in all sectors.
A complete report on the deliberations of the Board of Governors’ Meeting for November 2010, presenting macroeconomic developments and monetary policy, will be available in the Monetary Policy Review (MPR) on the Bank Indonesia website.(www.bi.go.id)