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Monetary Policy Review - February 2010

Monetary Policy Review
February 2010
The Monetary Policy Review (MPR) is published monthly by Bank
Indonesia after the Board of Governors’ Meeting each February,
March, May, June, August, September, November, and December.
This report is intended as a medium for the Board of Governors
of Bank Indonesia to present to the public the latest evaluation of
monetary conditions, assessment and forecast for the Indonesian
economy, in addition to the Bank Indonesia monetary policy
response published quarterly in the Monetary Policy Report in
January, April, July, and October. Specifically, the MPR presents an
evaluation of the latest developments in inflation, the exchange
rate, and monetary conditions during the reporting month and
decisions concerning the monetary policy response adopted by
Bank Indonesia.

Board of Governors
Darmin Nasution


Deputi Gubernur Senior

Hartadi A. Sarwono

Deputi Gubernur

Siti Ch. Fadjrijah

Deputi Gubernur

S. Budi Rochadi

Deputi Gubernur

Muliaman D. Hadad

Deputi Gubernur

Ardhayadi Mitroatmodjo


Deputi Gubernur

Budi Mulya

Deputi Gubernur

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Monetary Policy Review - February 2010

Table of Contents
I. Monetary Policy Statement ..........................................................3
II. The Economy and Monetary Policy ..............................................5
Developments in the World Economy.....................................................6
Economy Growth in Indonesia ...............................................................7
Inflation ..........................................................................................10
Rupiah Exchange Rate ....................................................................11
Monetary Policy ..............................................................................13
Interest Rates ...............................................................................13
Deposits, Credits, and Money Supply ...........................................15

Stock Market ...............................................................................16
SUN Market .................................................................................16
Mutual Funds Market ..................................................................17
Banking Conditions .....................................................................18
III. Monetary Policy Response ..........................................................19

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Monetary Policy Review - February 2010

I. MONETARY POLICY STATEMENT
Global economy continues to recover. Global economic recovery was
mainly buoyed by expansion in emerging countries, like China. In addition,
it is also backed by stronger domestic demand in developed countries, like
the U.S. and Japan, although with a more moderate pace. Meanwhile, a
recovery in Euro area run somewhat slower due to continued weakening
consumption as a result of high unemployment level and worsening
fiscal deficits in some countries. Based on those developments, the global
economic growth for 2010 is revised up.
In the global financial markets, global economic recovery continues to

support the performance of the global financial markets. Stock index was
on an upward trend, although it was interrupted by negative sentiment
came from signal of monetary policy tightening in China. Optimism in the
global financial markets was also sustained by the improved risk perception
in emerging markets. This has led to large capital inflows to emerging
markets, which supports favorable financial markets condition and
currency appreciation in some countries. Global inflation is estimated to
remain relatively low, making the monetary authorities in most developed
countries continue their accommodative monetary policy. With that, capital
inflows to emerging countries, including Indonesia, is expected to persist.
The continued improvement in the global economy had a positive impact
on the domestic economy. From the demand side, exports growth
has showed more encouraging performance, in line with rising global
demand. Likewise, household consumption remains strong, supported by
better purchasing power and consumer confidence. The implementation
of ASEAN-China Free Trade Agreement ACFTA is expected to bring
positive impact for domestic economy both through exports and imports.
Related to exports, Indonesia’s competitiveness in the natural resource
commodities will encourage exports. As for imports, ACFTA will support
the availability of cheaper raw materials and capital goods, and will, in

turn, improve production efficiency. Investment will also pick up, although
only slightly. Investment mainly occurred in the construction sector,
in the form of infrastructure. Other sectors that will also post strong
growth are manufacturing and trade sectors, particularly related to higher
consumption and exports, as well as transport and communications sector,
along with higher economic activity.

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Monetary Policy Review - February 2010

In terms of prices, inflation slightly picked up in January, 2010, but will
remain within the target range of 5 ± 1% in 2010. Inflation in January
2010 was 0.84% (mtm), or 3.72 (yoy), higher than the previous month
of 0.33% (mtm) or 2.78 (yoy). Inflation came mainly from volatile foods
due to lower production of rice. This rice price hike was triggered by the
decline related to seasonal factor and was also pushed by the increase in
Government Purchasing Price of rice (HPP) by 10% as well as expectations
on the rising Highest Retail Price (HET) of subsidized fertilizer in April 2010.
Meanwhile, the pressure from fundamental factors, which are reflected

in core inflation, was relatively stable. From the domestic side, supply
was still sufficient to respond to increasing demand, which managed to
keep price in check. Meanwhile, from external side, imported inflation in
certain commodities surged, especially sugar. This was in line with rising
international sugar prices. However, continued rupiah appreciation trend
was able to tame inflation pressure from external factors.
Improved export performance coupled with capital flows continues to keep
Indonesia’s balance of payments in surplus. Favorable global economic
condition, particularly in Indonesia’s trading partner countries, supports
the improvement of exports performance. The increase in exports is
expected to offset higher imports came from higher economic activity.
In addition, rising international commodity prices will support growing
optimism in the exports performance during the first quarter of 2010. That
condition supports current account surplus. Performance in the Balance
of Payment was also supported by surplus in the capital and financial
account corresponding with strong capital flows. The main factor behind
this surplus were stability in Indonesia’s economy, attractive yield in rupiah
denominated assets, as well as Fitch rating upgrade further improved the
attractiveness of rupiah assets. Issuance of government’s medium term
notes in the global market amounted USD 2 billion had contributed to the

capital and financial account surplus. With these developments, foreign
exchange reserves at the end of January 2010 arrived at 69.6 billion U.S.
dollars, sufficient to finance 5.9 months of imports and government
foreign debt. Solid performance of Indonesia’s balance of payments
stimulated the strengthening of the rupiah. The rupiah on average gained
1.90% to Rp9.275 per U.S. dollar. At the end of the period rupiah arrived
at Rp9.350 or gained 0.8% (ptp) from the year-end.
On the domestic financial sector, financial markets continued to show
an encouraging picture in line with stability in domestic economy and

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Monetary Policy Review - February 2010

improved global sentiment. In currency markets, increased banks liquidity
is reflected in the declining risk in interbank money market as well as
interest rate of O/N interbank money market which is maintained at
around the BI Rate. In the stock market, JCI gained 3.02% (mtm). Better
stock performance was corresponded with improving liquidity in the stock
market. Stock rally was interrupted by negative sentiment characterized by

global dynamics such as tightening in China, expectations of the banking
activity restrictions, exit policy in the U.S, as well as fiscal sustainability in
Greece. In the bond market, improving foreign debt rating of Indonesia
to BB+ from BB has encouraged reduction in SUN yield nearly across all
maturity spectrum. SUN yield dropped by 11 bps (mtm) on average.
Transmission of monetary policy in the financial sector also continued. This
was reflected in declining deposit rates and lending rates amid unchanged
BI rate since September 2009. Credit at the end of 2009 rose compared to
the previous month. On a monthly basis, the increase of credit (including
channeling) in December 2009 reached Rp39, 9 trillion, or posted 2.8%
growth. Going forward, the transmission of monetary policy is expected
to improve further in line with better perception on the economy and the
commitment of banks to cut interest rates.
From the banking sector, national banking conditions remained stable.
Banking stability is reflected in the maintained capital adequacy ratio (CAR)
as of December of 17.4%. Meanwhile, the ratio of gross non-performing
loans (NPLs) remain under control at 3.8%, with a net ratio of 0.9%.
Banks liquidity, including liquidity in the interbank money market, and
deposits growth continued to improve.
On 4 February 2009, the Board of Governors’ Meeting at Bank Indonesia

decided to keep the BI Rate unchanged at 6.5%. This decision was
taken on the basis that the BI Rate at this level remains consistent with
achievement of the 2010 inflation target, set at 5%±1%, and is supportive
of measures to strengthen the economic recovery process, safeguard the
financial stability and promote banking intermediation.

II. THE ECONOMY AND MONETARY POLICY
Performance of the Indonesian economy continued to show improvement
in line with better economic conditions and global financial markets.
Related to prices, inflationary pressures picked up slightly entering 2010,

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Monetary Policy Review - February 2010

although for the whole year is predicted to stay in the target range.
Meanwhile, monetary policy relaxation in 2009 to had encouraged higher
asset prices, including JCI. On the banking sector, national banking
conditions remain stable.


Developments in World Economy
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The global economic recovery continued supported by strong growth in
developing countries, especially Asia. Meanwhile, the economic recovery
process in developed countries also continued, though at more moderate
pace. Slowed recovery in developed countries was still overshadowed
by high unemployment and limited banking credit. However, the fiscal
stimulus in the U.S. and Japan had been able to push domestic demand,
reflected by higher household consumption. Stronger household
consumption can be seen through better indicator of retail sales and
household spending. Meanwhile, the recovery in the Euro area also slowed
as household consumption weakened caused by rising unemployment and
worsening fiscal deficits in some countries such as Greece and Ireland.



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Graph 2.1 US Household Real Income
Spending

U.S. economy posted better growth amid unstable improvement in labor
market. U.S growth was backed by higher consumption as reflected in the
indicators of retail sales, household expenditure (Graph 2.1), and consumer
confidence. The increasing household consumption was driven by yearend holiday period and the stimulus rebate for the car purchase (cash for
clunkers). On the other hand, the U.S. unemployment rate remained at a
high level of 10.0% in December 2009. The figure had came down from
its highest level of 10.2% in October last year.
Production sector in the U.S. had responded to higher demand. Yearend holiday season and fiscal stimulus had encouraged higher domestic
consumption and lead to rising production in the U.S. manufacturing
sector. Improvement in U.S. production was seen in rising production index
and production capacity after falling in QII-2009 (Graph 2.2). In line with
those indicators, Purchasing Manager Index (PMI) went up in December.

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Excess liquidity and policies by the Fed and other major central banks to
keep interest rates at low levels had encouraged persistent capital inflow
to emerging markets. However, the global financial market performance
was interrupted by the pressure came from signal of monetary tightening
in China and the U.S. Federal Reserve’s plan to restrict the speculative

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Graph 2.2 US Industrial Production and
Capacity Utilization

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Monetary Policy Review - February 2010

banking activity. Substantial capital flow into emerging markets and the
maintained risk perception have led to the strengthening of exchange rates
and stock markets in Asia.
Global inflationary pressures began to picked up corresponded to rising
commodity prices and world economic activity. Global inflation forecasts
for 2010, in January 2010, rose slightly to 3.05% (yoy). Policy rates in
developed countries remained at low levels. In January 2010, most major
central banks like the U.S. and Japan still keep interest rates unchanged
in an effort to boost domestic economic recovery. On the other hand,
the BoE has a difficult choice due to the slow economic recovery but at
the same time was faced with high inflationary pressure, higher than its
inflation target.
Meanwhile, the Danish central bank had lowered the interest rates by 10
bps to reconcile to the rate in the euro area of 1.0%. Injection of liquidity
and purchase of toxic assets under the framework of quantitative easing
policy was still carried out by several major central banks like the U.S.
and the UK, although at smaller scale. Signal of monetary tightening in
developing countries began to surface despite the fact that the policy rate
hike was still on hold. The rapid economic recovery and rising inflationary
pressures in Asian countries has made some Asian central banks to hold
interest rates cut. Some countries such as China and India have started
tightening their monetary policy by raising reserves requirement ratio, by
50 bps and 75 bps respectively.

Economic growth in Indonesia
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Graph 2.3 Sales of Electronic Product

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Improved economic growth is expected to persist in the first quarter of
2010 in line with higher demand and global economic development.
On the demand side, higher GDP growth is driven by stronger growth in
household consumption, investment and exports. Household consumption
is estimated to pick up slightly driven mainly by better purchasing power
and improved consumer confidence. Exports is also expected to improve
further, sustained by the surging demand from trading partner countries
and higher international commodity price. Accordingly, investments are
also expected to chart better growth corresponded to stronger demand
and business confidence. Responding to higher domestic and external
demand, imports will also go up. On the supply side, some sectors are
forecasted to perform better along with higher external and domestic

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Monetary Policy Review - February 2010

demand in the first quarter of 2010. Better demand is expected to
stimulate growth in some main sectors including manufacturing as well
as trade, hotels and restaurants sectors. Meanwhile, the performance of
other sectors such as transport and communications sector remain strong
and become a main driver to economic growth.
Private consumption in the first quarter of 2010 is forecasted to post
stable growth. This estimation is in line with better leading indicators
of household consumption. Government plan to raise civil servants, TNI
and the Police salary by 5% and an increase in Minimum Regional Wage
(UMP) in early 2010 will support higher purchasing power. Improvement
in household consumption was also supported by some prompt indicators.
Consumption of durable goods such as cars, motorcycles, and electronics
went up (Graph 2.3). Retail sales index also rose, up to fourth quarter of
2009, buoyed by expanding consumption in the clothing and equipment
as well as food and tobacco (Graph 2.4). Better consumption growth
was also reflected in the rising growth of imports of consumption goods
(Graph 2.5). In keeping with these developments, indicators related to
consumption financing such as real M1 growth also trend up (Graph2.6).
Investment growth (GFCF) in the first quarter of 2010 is forecasted to
edge up along with encouraging development in external and domestic
demand. Higher investment is sustained mainly by the construction
as indicated by high cement consumption (Graph 2.7). This is also
accompanied by imports of capital goods (Graph 2.8) that grew along
with better business optimism. The major driver of investment growth
in the first quarter of 2010 comes from construction. However, financial
support from banking remains limited, as indicated by declining growth of
real investment credits (Graph 2.9). Business perception survey, conducted
by Bank Indonesia showed optimist investor’s appetite to invest. Business
Survey (SKDU-BI), also showed that business activities during the fourth
quarter of 2009 expanded slightly, lower than the previous quarter of
15.33%, mainly contributed by the financial sector, leasing and corporate
services, mining sector, and agricultural sector (Graph 2.10). Although
slowed, business activity in the first quarter of 2010 is expanding driven by
optimism on the business situation and the company’s financial condition
as well as higher price relative to the previous quarter.
Along with continued improvement in Indonesia’s trading partner
countries, exports in the first quarter of 2010 is expected to pick up. This
is reflected in the improvement of demand in the developed countries,

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Graph 2.4 SPE BI : Retail Sales Index

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Graph 2.5 Growth of Consumption Goods’
Import and GDP Private
Consumption

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Graph 2.6 Growth of Real M1 and GDP
Private Consumption



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Monetary Policy Review - February 2010





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Graph 2.7 Growth of Cement Consumption



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Graph 2.8 Growth of Imports of Capital
Goods

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Graph 2.9 Investment Credit and Gross Fixed
Capital Formation

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especially US, and Asia emerging markets such as China and Singapore.
Optimism in exports growth is supported by an upward trend in the
production index, consumer confidence levels and business sentiment in
G3 countries and China until the year-end of 2009. In addition, an upward
trend in international commodity prices had a positive impact on world
trade volume, which is reflected in the rising Baltic Dry index. According
to the sectors and groups of commodities, non-oil export growth was
sustained by exports of primary commodities in mining sector such as coal
and manufacturing products such as palm oil.
Growth of imports in the first quarter of 2010 is also forecasted to go up
in line with growing domestic and external demand. Higher import growth
is sustained by the improvement in household consumption and demand
for raw materials and capital goods for production activities primarily in the
manufacturing sector. In addition, continued increase in import growth is
confirmed by higher import duties in 2009. Higher import duties reflecting
increased value of imports. Following the implementation of the AC-FTA
in January 2010, imports of manufacturing products such as textiles come
from China is also expected to increase. The source of imports growth
will mainly come from higher imports growth of raw materials. Imports
growth during January-December 2009 was driven by some commodities
associated with added production capacity, such as machinery / mechanical
appliances and electrical machinery and equipment.
From production side, improvement is expected to continue in the first
quarter of 2010 along with the stronger external demand and stable
domestic demand. Major sectors, namely the manufacturing and trade
sector are forecasted to perform better in the early quarter of 2010.
Meanwhile, the performance of other major sectors, agricultural sector, is
forecasted to chart lower growth compared to the previous quarter. Lower
growth might come from delayed planting season in October-December
2009 due to El Nino. Transportation and communication sectors as well
as electricity, gas and water are still in the high growth rate. The high
growth in transportation and communication sector is mainly supported by
strong performance in the telecommunications sub-sector. Meanwhile, the
mining sector is forecasted to have the potential to grow higher supported
by the increasing trend in demand for mining commodities in line with
better global economic conditions. The largest share of the economy is
still coming from the manufacturing sector, trade, hotels and restaurants
sector, as well as the agricultural sector. Meanwhile, the main drivers of

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Monetary Policy Review - February 2010

growth are transportation and communications sector, trade, hotels and
restaurants sector, as well as the manufacturing sector.

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Inflation
Entering 2010, inflationary pressures went up slightly due to nonfundamental factors. However, for the entire year inflation is estimated
to stay within its target range of 5% ± 1%. Inflation in January 2010 was
recorded at 0.84% (mtm) or 3.72% (yoy), higher than the previous month
of 0.33% (mtm) or 2.78% (yoy). Increased inflation pressure mainly came
from non-fundamental factors, particularly in the volatile foods, primarily
due to rising prices of strategic food commodities (rice). Meanwhile,
the pressure of fundamental factors as reflected in core inflation also
slightly picked up. From the external side, the continued trend of rupiah
appreciation can reduce imported inflation amid certain commodity prices
increase. From the domestic side, the interaction of demand and supply
side has not led to pressure on prices in general.
Looking from its affecting factors, rising inflation was mainly driven
by increases in volatile food. Higher volatile food inflation was mainly
contributed by the increase in rice prices in line with the decline in rice
production related to seasonal factor. In addition, government policy to
raise government purchasing price (HPP) of rice by 10% and the estimated
increase of highest retail price (HET) of subsidized fertilizer in April
2010 had pushed up the price of rice. On the other hand, international
commodity prices only had a benign impact on domestic food inflation.
In general, increased inflation pressure mainly occurred in the related food
category related to reduced production of main food commodities such as
rice due to seasonal factors, the psychological impact of increased in HPP
of rice and HET of subsidized fertilizer. On a monthly basis, food category
also became the biggest contributor to inflation in January 2010 amounted
of 0.40%. Other category also contribute to CPI inflation pressure is the
processed food category with a contribution of 0.33%. In the meantime,
the only group that contributed to deflation in January 2010 is clothing
category related to falling gold price.

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Graph 2.10 Business Plan (SKDU-BI)

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Graph 2.11 Inflation

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Administered prices inflation is still relatively low due to no strategic price
policies issued by the Government in the reporting period. Administered
price inflation in January 2010 was recorded at 0.44% (mtm), lower than

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Graph 2.12 Inflation by Category of Goods
and Services (%, mtm)

Monetary Policy Review - February 2010

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Graph 2.13 Quantity of Rice for Poor
and Rice Prices

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Graph 2.14 Retailer Inflation Expectation
(Bank Indonesia Retail
Sales Survey)

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Graph 2.15 International and Domestic
Sugar Prices

Core inflation began to pick up, both in monthly and yearly basis, although
remain relatively low along with benign external pressure and maintained
inflation expectations. Core inflation was recorded at 0.59% (mtm) or
4.43% (yoy), slightly went up compared to the previous month of 0.40%
(mtm) or 4.28% (yoy). The continuing trend of appreciation of the rupiah
can reduce pressure on imported inflation came from higher prices in
certain commodity (Graph 2.14). Rising international commodity price are
still relatively moderate, except for sugar (Graph 2.15). Meanwhile, gold
contribute to deflation to the core inflation (0.04%). On the other hand,
economic recovery has not put pressure on the demand as response from
the supply side remained adequate. Increased demand also reflected in the
higher sales index in December of 3.7% (mtm) and 32.3% (yoy) (Graph
2.16).

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Volatile food inflation rose, both in monthly and annual basis came mainly
from lower domestic rice production related to the seasonal pattern
(Graph 2.13). Planting season for 2010 is estimated to be delayed around
10-20 days associated with the El Nino effect, although for the whole year
of 2010 rice production is predicted to go up. The psychological impact
of an increase in HPP of rice on January 1, 2010 and HET of subsidized
fertilizer scheduled on April 2010 had pushed volatile food inflation. With
these developments, volatile food inflation was recorded at 1.98% (mtm)
or 5.17% (yoy), higher than the previous month of -0.19% (mtm) and
3.95% (yoy).

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the previous month of 0.68% (mtm). The main commodity contributed
to the inflation is the fuel of households (0.03%) and cigarettes (0.04%).
Administered inflation in the month of January 2010 among others
came from non subsidized fuel price hike (pertamax, Pertamax Plus, etc.),
although only have mild impact to inflation in January 2010.

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Rupiah Exchange Rate
During January 2010, the rupiah strengthened, although had a slight
pressure at the end of the month. Prospects for the domestic economy
which is quite solid and attractive yield in rupiah assets among the Asian
countries were able to support the stability of the rupiah. Pressure occurred
at the end of months, were influenced by, among other, the negative
sentiment in global financial markets. Negative sentiment came after

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Monetary Policy Review - February 2010

the release of JP Morgan’s losses and the U.S. financial sector policies,
worsening fiscal deficits in several European countries, and the decision
of the India and China monetary authority to raise reserve requirement
(GWM).
Entering the year of 2010, the rupiah strengthened. During January 2010,
the average rupiah strengthened 1.90% to Rp9.275 per U.S. dollar (Graph
2.17) and closed at Rp9.350 per dollar or strengthening 0.80% relative to
last month. The rupiah had touched the level of Rp9.153 per U.S. dollar,
the strongest level since October 2008, although it was later weaken due
to the negative sentiment triggered by uncertainties in the external sector.
Exchange rate movements during January 2010 have an impact on the
increasing volatility of 0.20% (December 2009 position) to 0.96% in the
reporting period (Graph 2.18).
Risk perception is still relatively well preserved in line with maintained
expectations on the rupiah. Although increased as a response from the
global financial market, Indonesia’s risk perception is relatively stable
compared to December 2009 due to solid economic fundamentals and
rating upgrade by Fitch from BB to BB +. This provides incentives for
investment prospects in Indonesia. Spread EMBIG moved up to 323 bps
from 294 bps level at the period of December 2009 (Graph 2.21). Yield
spread between Indonesia global bond and U.S. T-Note also went up to
228 bps from 174 bps at December 2009. Meanwhile, the CDS spread
was slightly down from 192 bps in December 2009 to 190 bps in line with
the CDS movement in Asian emerging markets. Other risk indicators, ie,
the swap premium was also stable indicating no pressure on the rupiah
(Graph 2.22).
Relatively wide spread of rupiah denominated assets with those in other
currencies had helped support the stability of the rupiah. Uncovered
Interest Rate Parity (UCIP) in January 2010 was 6.48%, relatively
stable when compared with the level of 6.51% in the previous month.
Meanwhile, a little increased risk indicator at the end of the period have
caused covered interest rate parity (CIP) went down to 4.21% from 4.77%
in December 2009. Although declining, rupiah yield spread was still higher
than other countries in the region make Indonesia remain attractive for
global investor (Graph 2.23). Those condition supported the stability of the
rupiah amid disruption in the global financial market.

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Graph 2.16 Real Sales Growth
(Bank Indonesia Retail Sales Survey)

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Graph 2.17 Average Rupiah Exchange Rate


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Graph 2.18 Rupiah Exchange Rate Volatility

12

Monetary Policy Review - February 2010

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Graph 2.19 Performance of Global
Stock Markets

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Graph 2.20 Appreciation/Depreciation
Exchange Rate Average (January
2010 compare to December
2009)



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Graph 2.21 Indonesia Risk Perception Indicator

In January 2010, monetary policy transmission to short-term interest
rates went well. Under unchanged BI rate of 6.50%, average daily rate
of O/N inter-bank money market (PUAB) dropped 3 bps to 6.23%. The
development showed that O/N PUAB rate is relatively stable around the
BI Rate. In addition, monetary policy also transmitted to longer maturity
PUAB rate. Abundant banks liquidity have pushed PUAB rates to continue
falling, especially for periods of over 27 days. This condition indicates the
improved perception of counterparty risk.
Maintained liquidity in financial markets was in line with better risk
perception. Liquidity in the money market was more evenly distributed, as
reflected in the narrower spread between the highest and lowest interest
rates daily average. That condition, in part, came from Bank Indonesia’s
efforts to maintain adequate liquidity in the money market through Open
Market Operations and the interest rate corridor (standing facilities).
Amid stable BI rate, deposit rates continue to decline significantly. In
December 2009, 1 month deposit rates were reduced by 29bps, larger
than the previous month of 22bps. In 2009, 1 month deposit rate fell
353bps greater than the decline in the BI Rate of 300bps. Meanwhile,
interest rate of deposits for all maturities went down 33bps on average
in December 2009. The largest drop occurred in 12 months deposit rate,
which went down 86bps, while 24 months deposit rate went up 4bps.
That condition reflected banks intention to provide more incentives for
longer-term fund placement. From the category of banks, state-owned
banks posted the largest deposits rate decline during the period. In
December 2009, state-owned banks registered lower deposit rates of
51bps, followed by national private banks of 23bps and joint venture
banks of 14bps.
Monetary policy transmission to the credit rates was limited. Although
slowed, the decline in credit rates continued until December 2009. In
aggregate (average of interest rates of working capital credit, investment
credit, and consumption credit) in December 2009 fell by 13bps, or better
than the previous month of merely 9bps. The largest interest rate cut
occurred in working capital credit (KMK) which was down by 29bps, while

13

Monetary Policy Review - February 2010

investment credit (KI) and credit consumption (KK) went down by 7bps
and 5bps respectively. Private national banks posted the largest credit rates
cut, followed by state-owned company.


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Limited monetary policy transmission to the credit mainly related to bank’s
risk perception and high margin. Bank’s high risk perception is reflected
in wide interest rate spreads between credit rates and Base Lending Rate
(BLR), while bank’s high can also be indicated by widening spread between
real deposit rates and real credit rates. On the other hand, bank’s cost of
fund was somewhat higher than the 2007-2008 period despite the fact
that current BI rate was lower than in the 2007-2008 period. The condition
is mainly related to the realignment process of deposit rates that made
deposit rates higher than the BI rate during the global crisis in October
2008.

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Graph 2.22 Swap Premium


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Graph 2.23 Comparison of Some Regional
Countries Yield Spread
Government Bond

Table 2.1
Development of Various Interest Rates
Interest Rate (%)

BI Rate
Deposit Guarentee
1-month Deposit (Weighted Average)
Base Lending Rate
Working Capital Credit
Invesment Credit
Consumption Credit

14

2009
Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

8.75
9.50
10.52
14.18
15.23
14.37
16.46

8.25
9.00
9.88
13.98
15.08
14.23
16.53

7.75
8.25
9.42
13.94
14.99
14.05
16.46

7.5
7.75
9.04
13.78
14.82
14.05
16.48

7.25
7.75
8.77
13.64
14.68
13.94
16.57

7.00
7.50
8.52
13.40
14.52
13.78
16.63

6.75
7.25
8.31
13.20
14.45
13.58
16.66

6.50
7.00
7.94
13.00
14.30
13.48
16.62

6.50
7.00
7.43
12.96
14.17
13.20
16.67

6.50
7.00
7.38
13.01
14.09
13.20
16.53

6.50
7.00
7.16
12.94
13.96
13.03
16.47

6.50
7.00
6.87
12.83
13.69
12.96
16.42

Monetary Policy Review - February 2010

Deposits, Credits, and Money Supply


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Graph 2.24 Developments of Various
Interest Rates

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Graph 2.25 Developments of Funds
and Credit

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Grafik 2.26 Pertumbuhan Kredit per Jenis
Penggunaan

In December 2009, deposits increased by Rp76, 1 trillion to Rp1.973
trillion. This increase comes from rupiah funds specifically rupiah saving
deposits of Rp50 trillion and Rp19, 9 trillion in rupiah time deposits.
Meanwhile, increasing rupiah demand deposit was relatively lower,
amounted Rp8, 1 trillion, which mainly came from the increase in
ownership of a private companies and individuals. Although overall
deposits picked up, the deposits in 2009 posted a somewhat slower
growth relative to previous year, from 12.5% (yoy) to 16.1% (yoy) (Graph
2.24).
Credit growth in monthly basis increased. In December 2009 the growth
of credit (including Channeling) reached 8.7% (yoy) higher than the
previous month of 4.3% (yoy). Credits (including Channeling) in December
2009 rose Rp39, 9 trillion from the previous month, the highest increase
in 4 (four) years in the same period. From its category, the driver of credit
growth came from consumer credits. Meanwhile, working capital credits
have started to improve. On annual basis, growth in working capital
credits, investment credits and consumer credits in December 2009
reached 2.7%, 16.4%, and 19.0% respectively (Graph 2.25).
Although picking up in the monthly basis, credit growth for 2009 is still
lower than it was in the previous year. Restraint transmission of monetary
policy through credit lines came both from the demand and the supply
side. From the demand side, credit growth slowed in line with slowing
domestic and external demand coupled with high interest rates (Graph
2.26). Meanwhile, from the supply side, credit extension was constraints
by high risk perception triggering resistance in further credit rate cut.
Liquidity in December 2009 improved relative to the previous month. On
an annual basis, growth in M1, M2, and M2 rupiah rose 8.4%, 13.1% and
13.9% (yoy) respectively, higher than the previous month of 6.8%, 11.5%
and 13.0 % (yoy) (Graph 2.27). M1 went down Rp1, 9 trillion to Rp505,
6 trillion associated with the seasonal pattern of government expenditure
at the year-end. Meanwhile, M2 and M2 rupiah positions increased Rp77,
7 trillion and Rp80, 1 trillion respectively, in line with rising quasi-money
component. Those conditions reflecting slowed economic activities as
can also be seen in M1 growth which remained at a level lower than its
historical average.

15

Monetary Policy Review - February 2010

Stock Market
JCI improved in January 2010. JCI rose by 3.02% and was closed at
2610.8.