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Monetary Policy Review Q-II-2012

In the near future, Bank Indonesia will focus on the efforts of maintaining internal and external imbalances especially maintaining exchange rate and inflation. Current interest rate policy combined with macro prudential policy will still be implemented to control inflationary pressure especially in demand side. Furthermore, coordination with government needs to be strengthened to address the supply side unpredictability.

The level of inflation predicted in Quarter II-2012 is 4.5% ± 1% which pushed by external and domestic factors.

On the external side, the world economic slowdown and has contributed the decrease of world commodity price alongside the decline of global demands combined with financial turmoil in Europe and United States. Global inflationary pressure has projected to continue on downward trend with the slow pace of economic recovery.

On the domestic side, core inflation is still on the range of control maintained by stable level of domestic aggregate demand described by steady growth of retail sales and improvement in inflation expectation. In addition, it also expected that the supply side response will be adequate to comes up with constantly high demand indicated by increasing level of industry capacity utilization.

Indonesian economic growth in 2012 estimated at 6.2% contributed by stable household consumption bolstered by strength consumer confidence, steady investment accumulation with robust growth of gross fixed capital formation, improved absorption of government spending through realization of state budget, and slow net export caused by weakening export performance and constantly high level of import.

Household consumption predicted to be maintained by retail and fast moving consumer goods sales activity which are remain stable. Car and motorcycle sales remains optimistic since manufacturer always introduce many new models to the market, besides the fact that a new regulation concerning down payments on motor vehicle loans does not appear to have significant impact on sales.

Investment activity growth mainly contributed by of non-construction sector, such as improvement in machinery, transportation equipment, and also capital formation of industry sector. In financing side, there is also a growth in investment credit triggered by low level of credit interest rate.

Government consumption expected to rise after government able to increase the absorption level of budget in actions that include accelerated processing of government procurement/tendering and also capital expenditures, also by simplifying tender procedures and fast-tracking the implementation of Land Acquisition Law.

On the side of export, the contraction on volume of world trade and the decreased intake of export in major destination countries has put pressure on export performance besides constantly decreasing world commodity prices. Non-oil gas has made a sluggish performance by losses in manufacturing and agricultural exports, while some of Indonesia’s key manufacturing export commodity maintained in low level of growth.

In the side of import, stable demand of import goods for investment activity has maintained import level on a steady high contributed by non-food commodity such as passenger car and durable goods. On the other hand, import of oil and gas had slowed by increase of oil and gas production lately.

In the period of 2012, Indonesia economic performance is predicted in a slow growth, mainly impacted by slowdown in sectors overshadowed by falling external demand.
Manufacturing Sector performance was boosted by food and beverage sector growth especially after the boom of minimarket and convenience store franchising industry, also seasonal event such as fasting month and Ramadan holiday. Besides F&B performance, cement and automotive industries also being key of manufacturing sector growth. In addition, government MP3EI program expected to accelerate construction and of infrastructure which could leads to construction sector emergence.

Trade sector is expected to maintain decent performance despite of global economic downturn boosted by domestic demands of import. Hotel and restaurant subsector performance relatively stable. Tourism industry believed to have impact in this industry performance.
Transport and communication sector expected to have stable growth. High performance of demand on transportation responded by airlines with fleet expansion, more routes, and numbers of flights while cargo activity carried by air, land and sea also on the rise. In communication sector, growing number of subscribers in mobile cellular service has advanced this sector progress. Now mobile broadband service becomes the major business platform for telecommunication industry with the rising demand for consumer data services.

Indonesia Balance of Payment performance experience a suffer decline as the result of weakening in current account balance. On the other hand, capital and financial balance maintain positive performance promoted by inflow of FDI and high level of international reserves. Strong economic activity maintain import level in a steady high, while export performance experience a downturn alongside the uncertainty of global economic recovery. Inflow in FDI dominates foreign capital inflows besides portfolio investment, while portfolio investor still hold their funds and waiting the uncertainty of global financial market conditions related to European crisis.

Rupiah volatility has experienced a pressure from external and internal development. From the external side, the global financial uncertainty especially in Europe feared to spread negative sentiment to Asian market. In the other hand, domestic demand of forex and high level of import tends put a burden to Rupiah performance. However, investment in Rupiah instrument has retained its competitiveness.

In the near future, Bank Indonesia will focus on the efforts of maintaining internal and external imbalances especially maintaining exchange rate and inflation. Current interest rate policy combined with macro prudential policy will still be implemented to control inflationary pressure especially in demand side. Furthermore, coordination with government needs to be strengthened to address the supply side unpredictability.

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