Monetary Policy Review - September 2010
5
non-performing loans NPLs gross at below 5.0. Improvement in the banking intermediation function is reflected in more robust credit
expansion at 20.3 yoy in August 2010.
In the Board of Governors» Meeting convened on 3 September 2010, Bank In the Board of Governors» Meeting convened on 3 September 2010, Bank
In the Board of Governors» Meeting convened on 3 September 2010, Bank In the Board of Governors» Meeting convened on 3 September 2010, Bank
In the Board of Governors» Meeting convened on 3 September 2010, Bank Indonesia decided to keep the BI Rate at 6.50
Indonesia decided to keep the BI Rate at 6.50 Indonesia decided to keep the BI Rate at 6.50
Indonesia decided to keep the BI Rate at 6.50 Indonesia decided to keep the BI Rate at 6.50. However, in view of the
potential for future inflationary pressure and the considerable excess liquidity in the banking system, the Board of Governors emphasises the
importance of raising the Primary Statutory Reserve Requirement from 5 to 8 of rupiah depositor funds. The additional 3 held in Primary
Statutory Reserves will be remunerated at 2.50 p.a. This policy combination is considered adequate to safeguard monetary stability and
financial system stability amid the present high rate of capital inflows. Similarly, to promote the banking intermediation function, the Board of
Governors has also imposed a statutory reserve requirement based on the LDR loan to deposit ratio as a means of ensuring credit growth firmly
based on prudential banking principles. Under this requirement, the lower limit of the LDR is 78 and the upper limit 100. A bank with an LDR
outside this range will be subject to a disincentive based on variance in the LDR from the targeted range. If the LDR is higher than the target but the
bank maintains adequate capital, it will receive an incentive. The new statutory reserves policy will be phased in with the primary statutory
reserve requirement launched on 1 November 210 and the LDR statutory reserve requirement effective from 1 March 2011.
Monetary Policy Review - September 2010
6
II. THE ECONOMY AND MONETARY POLICY
Signs point to a slowdown in the global economic recovery, triggered primarily by less vigorous recovery in the US, China and Japan. Indications
of the slowing global recovery have prompted a downturn on global stock markets and weakened prices for some globally traded commodities. On
the other hand, inflation in emerging market economies is steadily mounting. Advanced nations, however, have seen the onset of renewed
increases in inflation, albeit at a low level. The Indonesian economy is reporting steadily improved performance marked by brisk demand-side
expansion. This is indicated by the sizeable role of household consumption in contrast to investment, which despite growth is not at optimal levels. In
analysis by sector, non-tradable sectors are expanding at a rapid pace in contrast to the limited growth in tradable sectors and especially
manufacturing.
Developments in the World Economy
Concerns exist that the global economic recovery could stall due to Concerns exist that the global economic recovery could stall due to
Concerns exist that the global economic recovery could stall due to Concerns exist that the global economic recovery could stall due to
Concerns exist that the global economic recovery could stall due to slowing economic activity in the US, China and Japan
slowing economic activity in the US, China and Japan slowing economic activity in the US, China and Japan
slowing economic activity in the US, China and Japan slowing economic activity in the US, China and Japan. Indicators point to
slackening performance in the US and Japanese economies, with manufacturing activity in decline alongside weak consumption. At the
same time, the monetary tightening launched by the authorities in China has also led to a slowdown in China»s economy, although growth remains
at a buoyant level. Overall, the world economy is forecasted to chart reduced growth as reflected in the forecasts published by various
multinational agencies. Fears over the economic slowdown in the US and China have sent global stock markets into decline. The weakening on
global stock markets was triggered mainly by the release of data on US, Chinese and Japanese economic fundamentals that disappointed market
forecasts. However, the decision by most central banks to maintain an accommodative monetary policy was sufficient to ease the liquidity crunch
in some advanced nations. Asian stock markets were also comparatively resilient to the turmoil on global financial markets, bolstered by optimism
over forecasts for the region and low perceptions of risk.
In the US, the rate of economic recovery is beginning to ease In the US, the rate of economic recovery is beginning to ease
In the US, the rate of economic recovery is beginning to ease In the US, the rate of economic recovery is beginning to ease
In the US, the rate of economic recovery is beginning to ease. In the outcome for Q22010, the US economy grew by only 0.4 qtq, down
from the previous quarter when growth reached 0.9 qtq. While consumer spending mounted at 0.4 mom in August 2010, surpassing
Monetary Policy Review - September 2010
7
Graph 2.1. US Household Real Income Spending
Graph 2.2. US Purchasing Manager Index PMI
analyst forecasts Graph 2.1, the published 0.2 rise in personal incomes came in below the 0.3 projection by analysts, confirming the slowing
pace of US economic recovery. Lack of improvement in the US labour market has become a factor holding back incomes from rising. Similarly,
flagging manufacturing activity is visible in inventory levels that have slipped back into negative territory as a result of weak household demand.
The production index generated from the ISM survey of manufacturers July 2010 dropped to 55.5, although remaining above the expansion level
of 50 Graph 2.2.
The Japanese economy is faltering due to weak exports The Japanese economy is faltering due to weak exports
The Japanese economy is faltering due to weak exports The Japanese economy is faltering due to weak exports
The Japanese economy is faltering due to weak exports. The yen appreciation against the US dollar to a 15-year high has adversely
impacted Japan»s exports, which began slowing in July 2010. The knock-on effects on domestic manufacturing are evident in various indicators such as
the production index and the PMI survey compared to the preceding month. Similarly, indicators of consumption, such as retail sales and
household expenditures, have come under sustained pressure from rising levels of unemployment.
During Q22010, growth in Europe was bolstered primarily by growth in During Q22010, growth in Europe was bolstered primarily by growth in
During Q22010, growth in Europe was bolstered primarily by growth in During Q22010, growth in Europe was bolstered primarily by growth in
During Q22010, growth in Europe was bolstered primarily by growth in Europe»s leading nations
Europe»s leading nations Europe»s leading nations
Europe»s leading nations Europe»s leading nations. The weakening of the euro has had a positive
effect on European exports, boosting economic expansion to 1.7 yoy or 1.0 qtq. More robust exports have also have a positive impact on
manufacturing, as reflected in gains in the production index and new manufacturing orders as business sentiment picks up in Europe. Despite
this, consumption remains constrained by high unemployment and the limited fiscal headroom for governments to deliver a stimulus for economic
activity.
Softening economic fundamentals of the US and China have diminished Softening economic fundamentals of the US and China have diminished
Softening economic fundamentals of the US and China have diminished Softening economic fundamentals of the US and China have diminished
Softening economic fundamentals of the US and China have diminished the risk appetite of investors
the risk appetite of investors the risk appetite of investors
the risk appetite of investors the risk appetite of investors. Data released on the US and Chinese
economies, pointing to a slowing rate of economic recovery, has triggered a round of flight to quality reflected in rising gold prices and weakening
global stock values. On European financial markets, fears over contagion from the Greek crisis have receded following the release of positive
European GDP growth figures released for Q22010. Despite this, risk indicators for advanced nations are on a general upward trend, visible in
the widening of Credit Default Swaps CDS for some corporations including banks reflecting fears over a double-dip recession. The liquidity
crunch in advanced economies is easing further. Policies adopted by central banks in advanced economies include continuation of the quantitative
0,2
8 4
4 8
2008 mom
Source: Bloomberg Savings Rate RHS
Expenditure
5.9 0,4
Income
...up to July 2010
-2.0 -1.5
-1.0 -0.5
0.0 0.5
1.0 1.5
2.0
Jan Apr
Jul Oct
Jan Apr
Jul Oct
Jan Apr
Jul
2009 2010
expanding
contracting
ISM Manufacture ISM Services
Index
65 60
55 50
45 40
35 30
Jan Apr
Jul Oct
Jan Apr
Jul Oct
Jan Apr
Jul
2008 2009
2010
...up to July 2010
Source: Bloomberg
Monetary Policy Review - September 2010
8
easing programme and the maintenance of interest rates at an accommodative level, which has eased the liquidity crunch on the
interbank money market. Indicators of counterparty risk have also improved, as reflected in the stable highest-lowest spread in interbank
LIBOR quotations, the narrowing of the spread between 3-month Overnight Index Swap OISand the 3-month Libor and the stable TED
spread over 3 months.
Global inflationary pressure is showing signs of increasing in response to Global inflationary pressure is showing signs of increasing in response to
Global inflationary pressure is showing signs of increasing in response to Global inflationary pressure is showing signs of increasing in response to
Global inflationary pressure is showing signs of increasing in response to brisk economic growth in emerging market countries
brisk economic growth in emerging market countries brisk economic growth in emerging market countries
brisk economic growth in emerging market countries brisk economic growth in emerging market countries. The inflation
forecast for developing nations in 2010 August, based on the August 2010 Consensus Forecast, has risen to 5.31 yoy, while inflation in
advanced economies for 2010 is in fact predicted to drop to 1.42 yoy. At the same time, inflation expectations in advanced nations have begun
to climb, although still at a low level. Inflationary pressure in Asia is also on the rise, due to the recovery in economic activity within the region.
For the most part, advanced nations have maintained an accommodative For the most part, advanced nations have maintained an accommodative
For the most part, advanced nations have maintained an accommodative For the most part, advanced nations have maintained an accommodative
For the most part, advanced nations have maintained an accommodative monetary policy response
monetary policy response monetary policy response
monetary policy response monetary policy response. During August 2010, some central banks in
developed economies US, Japan, UK, Canada and Europe kept their policy rates on hold in view of still moderate inflationary pressure and
renewed signs of weakening economic performance. Some central banks also resumed quantitative easing, as exemplified by the Fed in its promise
to increase its buying of securities as a contingency measure in the event of a renewed downturn in the US economy. In other moves, the
Government of Japan is working with the Bank of Japan BoJ to curb the appreciation in the yen, which has risen to a record high for the past 15
years and could threaten exports and the recovery of the nation»s economy. To this end, the BoJ has committed itself to expand the stimulus for the
banking sector from the previous ∞10 trillion US116 billion to ∞30 trillion.
Despite this, some developing nations in Latin America and Asia have Despite this, some developing nations in Latin America and Asia have
Despite this, some developing nations in Latin America and Asia have Despite this, some developing nations in Latin America and Asia have
Despite this, some developing nations in Latin America and Asia have begun raising their policy rates to curb inflationary pressure and asset price
begun raising their policy rates to curb inflationary pressure and asset price begun raising their policy rates to curb inflationary pressure and asset price
begun raising their policy rates to curb inflationary pressure and asset price begun raising their policy rates to curb inflationary pressure and asset price
bubbles bubbles
bubbles bubbles
bubbles. One Asian central bank that lifted its rate in August was the Bank of Thailand with an increase of +20 bps. Among Latin American central
banks to raise their rates were the Banco Central de Chile with +50 bps and the Central Reserve Bank of Peru with +50 bps.
