Monetary Policy Review August 2008

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3 Monetary Policy Review August 2008 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 Boediono Miranda S. Goeltom Hartadi A. Sarwono Siti Ch. Fadjrijah Governor Senior Deputy Governor Deputy Governor Deputy Governor S. Budi Rochadi Deputy Governor Muliaman D. Hadad Ardhayadi Mitroatmodjo Budi Mulya Deputy Governor Deputy Governor Deputy Governor 1

4 Table of Contents I. Monetary Policy Statement... 3 II. Monetary Policy and Indicators... 4 I n f l a t i o n... 4 Rupiah Exchange Rate... 6 Monetary Policy... 8 Policy Strategy... 8 Interest Rates... 8 Funds, Credit, and the Money Supply The Capital Market Condition of the Banking System III. Monetary Policy Response

5 I. MONETARY POLICY STATEMENT In the Board of Governors» Meeting convened on Tuesday, 5 August 2008, Bank Indonesia decided to raise the BI Rate a further 25 bps to 9.0%. This decision was taken to reinforce the stability of the Indonesian economy and financial system and specifically to support the medium-term outlook for the inflation target. In the view of Bank Indonesia, there is a continued risk of future inflationary pressure driven by the turbulence in world oil and food prices and pressure from domestic demand. This strong risk of inflationary pressure was a key consideration for Bank Indonesia in the renewed BI Rate hike in August. Nevertheless, the inflationary impact of the fuel price hike has eased. To reinforce monetary policy effectiveness, the decision to raise the BI Rate was taken in tandem with optimisation of other monetary policy instruments, such as control of exchange rate volatility and absorption of excess liquidity in Open Market Operations (OMO). Under this integrated policy, the targeted inflation of 6.5%-7.5% in the year of 2009 is regarded as achievable. The 25 bps BI Rate hike in August 2008 is not expected to adversely impact economic activity in Indonesia. Various indicators point to continued robust domestic demand. Banking industry resilience remains strong, supported by the healthy operation of the intermediary function. Bank credit expansion is up at 31.6% (yoy) with non-performing loans (NPLs) having dropped to 4.08% (gross). Motor vehicle and cement sales are on a robust upward trend. In 2008, the Indonesian economy is forecasted to maintain vigorous growth on the strength of rising exports, private consumption and high government spending. Domestic demand is also bolstered by increased regional government expenditures and the launching of preparations for national elections in Monthly Consumer Price Index (CPI) inflation in July 2008 reached 1.37%, bringing the annual rate of inflation to 11.90% compared to 11.03% in the preceding month. Inflation for January-July 2008 thus came to 8.85%, far above the 2.72% charted for the same period one earlier. After taking account of the various risks and inflationary pressure expected to carry through to the end of the year, Bank Indonesia forecasts CPI inflation at the end of 2008 within the range of 11.5%-12.5% (yoy). Alongside this, the balance of payments is projected to maintain a strong surplus in 3

6 support of exchange rate stability. At the end of July 2008, international reserves stood at USD60.56 billion, equivalent to 4.7 months of imports and servicing of official foreign debt. Looking ahead, Bank Indonesia will consistently evaluate the outlook for the economy and inflation based on the latest available information in order to maintain an optimum monetary policy stance for the future. II. MONETARY POLICY AND INDICATORS Indonesia»s economic stability held firm during July 2008, with macroeconomic conditions well under control. The economy grew by 6.4% (yoy) on the back of robust export performance and high levels of consumption. These conditions portend further improvement in the Indonesian economy. One area necessitating close monitoring concerns the annual rate of CPI inflation and core inflation, which climbed again over the preceding month. Concerning exchange rate performance in July 2008, the rupiah appreciated both in monthly average and point-to-point. The improvement in the balance of payments provided solid support for the stability of the rupiah amid the ongoing turmoil on global financial markets. In the monetary sector, the BI Rate increase was followed by upward movement in deposit and lending rates. At the same time, the SBI auction and interbank money market rates for various tenors began to reflect the level of the BI Rate and future expectations. In the financial sector, stock market performance was down in comparison to earlier months, mainly due to external risks. However, government securities trading in July 2008 recorded increases in average daily trading volume and frequency of transactions. Inflation CPI inflation in July 2008 was again high at 1.37% (mtm), even though down from the 2.46% (mtm) recorded in the preceding month. Despite this fall, the annual rate of inflation in July 2008 reached 11.90% (yoy), up from the June 2008 level of 11.03% (yoy, Graph 2.1).»Measured cumulatively, inflation for January-July 2008 came to 8.85% (ytd). The surge in CPI inflation was fuelled primarily by non-fundamentals related to volatile foods inflation and administered prices inflation. Like before, the 4

7 %, yoy %, yoy Graph 2.1. CPI Disaggregation Transportation, Communication, 0.14 Contribution (m-t-m) and Financial Service 0.71 Inflation (m-t-m) Education, Recreation, 0.13 and Sport 1.74 Health Clothing Housing, Electricity, Water, 0.45 Gas, and Fuel 1.80 Food and Baverages,Cigaratte, 0.15 and Tobbaco Foodstuff % Graph 2.2. Inflation and Contribution of Inflation by Group (July 2008, m-t-m) %,yoy Wholesale Price Index Imported Inflation CPI 3 Commodities Imported -2-7 Depreciation / Appreciation Rp/USD Graph 2.3. Exchange Rate vs Commodities Imported Inflation and Core Traded CPI high volatile foods inflation came as a result of tight supply and distribution bottlenecks, but was also driven by sustained high prices for international food commodities. Alongside this, administered prices inflation was up following the government decision to raise prices for 12 kg bottled LPG and the ongoing shortages of this commodity in some major cities, while urban public transport fares continued to rise. In further developments, the seasonal trend in spending on education, persistently high expectations of inflation and sustained pressure from external factors also boosted core inflation. Leading in inflation with the most important contribution during July 2008 was the foodstuffs category with inflation at 1.85% (Graph 2.2). Other categories with significant contributions to inflation were the housing, water, electricity gas and fuels category at 1.8% and the foods, beverages, cigarettes and tobacco category at 1.07%. The surge in volatile foods inflation is explained primarily by supply-side difficulties, distribution bottlenecks and the ongoing impact of movements in international food commodity prices. Chicken and eggs were the leading commodities in contribution to inflation during July 2008, a result of high animal feed prices that have constricted supply. Inflation also mounted on the back of prices for seasonings, led by hot chilli peppers and red chilli, due to tightened supply following the end of the harvest season. The surge in administered prices inflation came mainly in response to the government decision to raise prices for kerosene and 12 kg bottled LPG, as well as the shortages of these commodities. These price increases resulted in a 0.28% contribution to inflation in this category. In further developments, the continued hikes in urban public transport fares in the wake of the fuel price hike accounted for a fairly high contribution to inflation at 0.06%. Another commodity boosting inflation was gasoline with a contribution of 0.02% due to increased prices for non-subsidised fuels (Pertamax, Pertamax Plus and Pertamina Dex). Analysed by fundamentals, the increased core inflation was driven primarily by sustained pressure from external factors and inflation expectations. Nevertheless, the appreciation in the average rupiah exchange rate mitigated inflation from external factors (Graph 2.3). In regard to supply-demand interaction, inflation generated by this factor calls for continued vigilance, despite predictions of decline. Analysed by component of goods, July 2008 core inflation was driven mainly by seasonal trends with the beginning of the new academic year and higher 5

8 prices for gold jewellery, with contributions to inflation at 0.07% and 0.03%. Other commodities contributing to inflation were cooked rice, noodles and fried chicken, due to persistently high raw materials prices, distribution costs and expectations. Inflation expectations remained generally strong, albeit with slight improvement. The easing trend in inflation expectations was borne out in the findings of the Retail Survey and Consumer Survey conducted by Bank Indonesia, which serve as an indicator of public expectations of inflation (Graphs 2.4 and 2.5). According to the survey findings, inflation expectations 3 months forward generally eased, despite continued increase in expectations 6 months forward. The lower inflation expectations are consistent with the tapering off in the second round effects of the May 2008 hike in subsidised fuel prices and downward movement in international oil and foodstuff prices. Rupiah Exchange Rate In July 2008, the rupiah exchange rate recorded gains both as monthly average and point to point. on average, the rupiah strengthened 1.39% from Rp 9,288 to the USD to Rp 9,160 to the USD (Graph 2.6). At the end of the month, the rupiah closed at Rp 9,095 to the USD (p-t-p), representing 1.44% appreciation over the end-june 2008 position of Rp 9,226. Volatility was also relatively muted, despite a modest rise from 0.35% in the preceding month to 0.65% (Graph 2.7). The combined Bank Indonesia and Government management of macroeconomic policy in tandem with a robust communications strategy succeeded in easing pressure on the rupiah (Graph 2.8). Positive sentiment accompanied by sustained attractive yields on rupiah investments helped bring in renewed capital inflows. At the same time, external factors continued to exert a positive influence amid the global economic slowdown and inflationary pressures.»foreign investors leaned towards risk aversion to avoid the financial sector woes in the United States, and as a result, have shifted funds into emerging market assets. Regional currencies gained not only from inflows of foreign funds, but also central bank actions to curb currency volatility in their drive to subdue inflation (Graph 2.9). Domestically, risk factors showed an overall improving trend, despite the high level of risk indicators.»the risk indicator reflected in the yield spread between Indonesia global bonds and US T-Notes eased in comparison to Index Grafik 2.4. Consumer Price Expectations Index Index Months forward Months forward (RHS) Graph 2.5. Trader Price Expectations Months forward 6 Months forward Rp/USD Graph 2.6. Average Rupiah Exchange Rate 9095 Daily Exchange Rate 8800 Monthly Average Annual Average Jan Jan 29 Feb 26 Mar 26 Apr 23 May 21 Jun Jul Aug Sep 10 Oct 8 5 Nov Dec 3 Dec 31 Jan 28 Feb 25 Mar 24 Apr May Jun Jul ,160 6

9 Jan 1 Mar 1 May Jul Sep Oct Jan Mar May Graph 2.7. Rupiah Exchange Rate Volatility VND CNY PHP THB SGD KRW JPY IDR Depreciation Volatility Volatility Average Daily Exchange Rate - rhs Jul Appreciation 3.51 Point to point Average Graph 2.8. Appreciation/Depreciation Exchange Rate in July 2008 compare to June % the previous month from 370 bps to 308 bps (Graph 2.10). The narrowing in the yield spread came largely in response to the drop in yield on Indonesia global bonds (65 bps), while yield on US T-Notes was generally stable (4 bps). In related developments, swap premiums, the other indicator of risk, began to stabilise at the end of the period, indicating reduced pressure from expectations of rupiah depreciation (Graph 2.11). On the external side, another indicator, the EMBIG (Emerging Market Bond Index Global) spread, remained high despite a recent change in direction marking improvement in risk. Despite this, investors still see investments in developed countries as carrying greater risk compared to emerging market countries, and for this reason foreign capital inflows continue to pour into emerging markets. Concerning yield, the interest rate differential, which reflects yield on rupiah-denominated investments, maintained a rising trend. This change resulted from continued increases in domestic interest rates even though foreign interest rates (led by the US Fed Funds rate) are predicted to maintain a stable trend in coming months. The indicator for rupiah yield, or uncovered interest rate parity (UIP), widened from 6.38% to 6.97%, significantly greater than for other countries in the region. At the same time, the indicator for attractiveness of government securities (yield spread between Indonesia Government Bonds, representing domestic government securities, and US T-Notes) narrowed somewhat from 9.29% in June 2008 to 7.92% at end-july Compared to yields in other countries in the region (ranging from % to 5.715%), rupiah instruments again offered far superior yield at 7.92% (Graph 2.12), giving them added attraction over investments denominated in other currencies. Index IDR JPY KRW SGD 95 THB PHP 90 CNY MYR VND 85 Jan Feb May Apr May Jun Jul 2008 Jan 1, 2008 = 100 Increasing index = appreciation to USD Graph 2.9. Movement in Major World and Regional Currencies CNY SGD JPY IDR MYR THB VND PHP KRW On the fundamentals side, the solid performance in the balance of payments underpinned the stability of the rupiah, with the Q2/2008 balance of payments again showing an estimated surplus. Exports forged ahead in Q2/2008, but were accompanied by continued surging growth in imports fuelled by domestic economic expansion and high international commodity prices. These conditions portend a reduced current account surplus compared to the forecasted level. Despite this, the overall balance of payments is predicted to maintain a surplus on the strength of improved performance in the capital and financial account. Performance in the capital and financial account was bolstered by high yields on rupiah placements, sustained confidence in the credibility of macroeconomic policy and expectations of an increase in interest rates that stimulated inflows of portfolio capital into Indonesia. In response to these 7

10 developments, international reserves at end-july 2008 stood at USD60.56 billion, equivalent to 4.7 months of imports and servicing of official debt. At the same time, the climate of world trade, marked by sustained high oil prices despite a downward trend and continued escalation in foodstuff and resource-based commodities, also strengthened Indonesia»s export performance. Indonesia»s exports in June 2008 reached USD12.90 billion, representing an increase of 0.06% over exports in May 2008 and 34.92% compared to June 2007.«On the other hand, imports in June 2008 came to USD12.02 billion, an increase of 3.13% over May Monetary Policy Rp/USD % 9,700 9,500 9,300 9,100 8,900 8,700 IDR/USD Yield Spread 8,500 Mar May Jul Sep Nov Jan Mar May Jul Graph Yield Spread Government Bond RI and US Policy Strategy On 3 July 2008, the Board of Governors» Meeting at Bank Indonesia decided to raise the BI Rate 25 bps to 8.75%. This decision was taken after careful consideration of the risks to economic stability and the Indonesian financial system and the economic growth outlook for this year and next year. Bank Indonesia will keep closely monitoring the condition of the economy, which is still marked by various uncertainties. In Bank Indonesia»s opinion, it is essential to maintain the cautious, measured monetary policy stance with the support of the policy for optimising Open Market Operations and policies in support of exchange rate stability. The decision to raise the BI Rate was automatically followed by across-the-board increases in interest rates linked to the policy rate. The overnight FASBI rate, representing the floor for overnight interbank rates, moved up to 5.75%. Similarly, the SBI Repo rate, representing the ceiling on the overnight interbank market, shifted to 11.75%. Interest Rates Overnight interbank rates maintained stable movement at around the BI Rate level. The overnight interbank rate has been adopted as the monetary policy operational target with effect from June Accordingly, all available OMO instruments have been deployed to manage banking liquidity in order to keep movement in money market rates at about the level of the BI Rate. During the month under review, the overnight money market rate saw some movement with an upward bias reflecting tight % Premi 1 M Premi 3 M Premi 6 M Premi 12 M -2.0 Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov Jan Mar May Source : Reuters (processed) Graph Swap Premium % Indonesia Malaysia Filipina Thailand Singapore Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov Jan Mar May Jul Graph Comparison of Some Countries Yield Spread 7,919 5,715 1,137 0,859-0,736 8

11 % Graph Banking Deposits Interest Rate Response to BI Rate June May BI Rate Domestic Private Banks Foreign and Joint Venture Banks State-Owned Banks Regional Dev. Banks General Banks market liquidity, but this condition subsequently eased with the intensified use of Fine Tuning Expansion (FTE) and adjustments in SBI auction volume. Time deposit rates moved upwards in tandem with the BI Rate. The 25 bps hike in the BI Rate in June 2008 was followed by increases in rates for 1, 3 and 6 month deposits, while longer tenors were relatively stable. Increases were reported in the 1-month deposit rate at commercial banks, measured as the counter rate and weighted average (Table 2.1). Only in this month did foreign and joint venture banks respond with rate hikes of their own, following a cumulative 50 bps BI Rate hike since May Regional development banks, on the other hand, appeared to keep deposit rates on hold (Graph 2.13). Loan interest rates mounted higher, as reflected in the 15 bps rise in the Base Lending Rate (BLR) to 12.95% at end-june Besides the BLR, lending rates disaggregated by category of use reported varying upward movement. The steepest rate increase took place in investment credit, followed by working capital credit. Investment credit rates climbed 15 bps in June 2008 to 12.51%, while working capital rates were up 7 bps at 12.99%. On the other hand, June 2008 rates for consumption credit were relatively stable at 15.71%. Interest Rate (%) Table 2.1 Development of Various Interest Rates Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul BI Rate month Deposit Guarantee month Deposit (Weighted Average) n.a 1-month Deposit (Counter Rate) Base Lending Rate Working Capital Credit n.a Investment Credit n.a Consumption Credit n.a 9

12 Funds, Credit and the Money Supply Funding growth has not showed acceleration in response to the decision to raise the BI rate.-in June 2008, annual growth in depositor funds reached 14.7%, down slightly from 15.3% in the preceding month. The reduced growth was especially noticeable in demand deposits and savings deposits. Time deposits, on the other hand, have begun to climb more rapidly with the upward movement in time deposit rates. Conversely, the BI Rate hike was in fact followed by accelerated credit expansion. Like before, the credit market was marked by the effect of the monetary policy lag evident in the brisk annual rate of credit expansion at 31.6% in June 2008, largely stable when compared to 31.4% in the previous month (Graph 2.14). Analysed by purpose of use, consumption credit again saw an increase in the annual rate of credit expansion, while growth in working capital credit and investment credit was stable. The accelerated expansion in consumption credit resulted mainly from growth in the others category, consisting of motor vehicle credit (Graph 2.15). Analysed by category of debtor, credit expansion was again driven by individuals and the private sector, in contrast to the slowing rate of credit expansion to government-linked institutions. Economic liquidity grew at a slower pace, even though still high by historical standards. In June 2008, M1 and M2 registered 22.4% and 17.0% growth, down slightly from 24.4% and 17.5% in the preceding month (Graph 2.16). Measured in real terms, 1 M1 and M2 growth averaged 11.4% and 6.0%, down from the previous month»s averages of 14.0% and 7.1%. Despite this, economic liquidity in real and nominal terms maintained brisk expansion ahead of the historical average ( ). This could be an indicator of strong potential for more rapid economic growth in the coming year. On the other hand, the M2 money multiplier reflected slower growth, consistent with the high demand for cash currency (Graph 2.17). Supporting this was the increased ratio for cash outside banks to deposits, up from the preceding month. In June 2008, the M2 money multiplier moved lower due to the effect of escalating demand for cash outside banks in the wake of the fuel price hike and payouts of Direct Cash Transfers. 1 Calculated by current inflation. (%, y-o-y) Total Deposits Total of Credit 3 Jul Dec May Oct Mar Aug Jan Jun Graph Development of Funds vs Credit Normalization gwcc gic gcc pwcc pic pcc Jul Dec May Oct Mar Aug Jan Jun Grafik Development Share & Growth Credit Y-o-Y % Graph Real Growth of M1 and M2 M1 M2 10

13 M2/M Graph Development of M2 Money Multiplier JCI C/Deposits MM2 (M2/M0) MM2 avg C/Deposits (RHS) C/Deposits avg (RHS) Graph JCI and BI Rate BI Rate% Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov Jan Mar May Jul Source : CEIC Rp billion 7,000 6,000 5,000 4,000 3,000 2,000 1,000 - (1,000) (2,000) Graph Stock Foreign Net Buying JCI BI Rate (895,4) (3,000) 1,500 Jan Mar May Jul Sep Nov Jan Mar May Jul Rp billion 2,900 2,700 2,500 2,300 2,100 1,900 1,700 The Capital Market The stock market fluctuated with a downward trend due to the knock-on effects of rising external risks. At end-july 2008, the IDX composite index closed at 2304, down 1.9% from the June 2008 position (Graph 2.18). This index loss is primarily attributable to heightened risks from external factors. Added to this, the continued fluctuation in oil prices put further pressure on the IDX. On the domestic front, surging inflation in June 2008 and the power crisis were added factors bearing down on market performance. Even so, the IDX composite was bolstered to some extent by positive sentiment from the passing of the law facilitating actions by the Federal Reserve to resolve the crisis at Fannie Mae and Freddie Mac. In addition, some listed companies published financial statements indicating relative improvement, which also strengthened the fortunes of the IDX composite index near the end of the month under review. As in the bearish trend on other global markets, the drop in the IDX composite represents the impact of portfolio adjustments by foreign investors. Some global stock markets have in fact undergone sizeable correction with the exodus of foreign investors, particularly from emerging market countries, in order to mitigate the fallout from the subprime mortgage crisis. On the domestic market, portfolio adjustments were reflected in heavy foreigner selling pressure until the second week of July 2008.«However, in the third week of that month, foreigners resumed net buying in reaction to undervalued condition of the stock market. In total July trading, foreigners still booked a net sale of Rp 895 billion, up from the previous net sale of Rp 444 billion (Graph 2.19). As a result, foreigner capitalisation, recorded at Rp 1,988.3 trillion in December 2007, fell in July 2008 to Rp 1,801 trillion. According to data from KSEI (Indonesian Securities Depository), foreign ownership slipped to 64.2% in July 2008 from the December 2007 position of 66.3%. On the government securities market, reduced fiscal risks have also eased upward pressure on yields. Yield on government securities was down across all tenors, led by medium-term instruments, which have undergone significant correction (Graph 2.20). The decline in yield was also accompanied by narrowing in the yield spread between long-term and short-term government securities. During July 2008, the long-term and short-term yield spread eased from 296 bps in the preceding month to 230 bps. Reinforcing this development is improved perceptions of economic fundamentals following the reduction in fiscal risk marked by the resilience 11

14 of the budget even with oil prices as high as USD150 per barrel. Added to this, inflation expectations began to ease following the improvement in oil prices, as reflected in the Consensus Forecast for June Foreigners expanded their portfolio holdings of long-term government securities. The nascent recovery in foreign investor confidence was evident in the ongoing shift in foreigner-held portfolios of government securities towards longer-term tenors. In July 2008, net foreigner buying of government securities reached Rp 5.87 trillion, 2 with insurance companies, mutual funds and pension funds booking net purchases of Rp 0.69 trillion, Rp 3.46 trillion and Rp 0.48 trillion (Graph 2.21). Acting as counterparts were recapitalised banks, non-recapitalised banks, securities houses and other sellers, who recorded the highest net selling of government securities at Rp 0.32 trillion, Rp 8.77 trillion, Rp 0.57 trillion and Rp 0.73 trillion respectively. Looking ahead, external factors may potentially constrain further performance gains for government securities. Factors with potential to curb performance on the government securities market include adverse conditions on global financial markets marked by the unabated housing crisis in the US, weakening of stock markets and global inflationary pressures. Under these conditions, market players tend to take a cautious stance, as reflected in declining volume and frequency of government securities transactions. However, when compared to the position for June 2008, both volume and frequency have improved slightly in government securities trading. Daily trading volume averaged Rp 4.5 trillion in July, up slightly from the June position of Rp 4.4 trillion. Alongside this, frequency of transactions mounted from 186 times to 243 times (Graph 2.22). % Graph Development Yield SUN Vol (Rp t) > 7 Years (Remaining Maturity) 5-7 Years (Remaining Maturity) <5 Years (Remaining Maturity) Seri Benchmark Jan Feb Mar Apr May Jun Jul Buy Sale Net (0.73) -14 (0.32) (0.57) (8.87) -18 Recapitalization Insurance Pension Fund Non Residence Bank Non Mutual Fund Securities Others Recapitalization Bank Graph Government Securities Trading Activities in July 2008 BI Net Assets Value (NAV) gained on the mutual funds market, buoyed by keen investor interest in protected funds. NAV edged upwards from Rp 94.4 trillion in June 2008 to Rp 94.5 trillion in July This improvement is explained by net subscriptions for protected funds reaching Rp 3.41 trillion, bringing NAV for these funds to Rp trillion. Looking ahead, the market is optimistic for NAV to reach the Rp 100 trillion marks at end Key to this is the performance of protected funds, currently the Vol (Rp t) Avg Vol Avg Frequency Frequency Net foreign buying and changes in foreign holdings sometimes produce different figures. This is because of the use of different data on government securities prices. Net foreign buying is calculated on prices at several end-of-week closing periods, while the government securities position is measured only at end of month Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov Jan MarMay JuliSep Nov Jan Mar May Jul Grafik Development of Volume and Frequency SUN Transaction 12

15 most sought-after product that has become the engine of growth in the mutual funds industry. On the other hand, market actors have responded to rising global risks and domestic inflationary pressure with high levels of caution on the corporate bonds market. Reflecting this is the drop in daily average trading volume for corporate bonds. Market players active in corporate bonds are also concentrating more on shorter-term trading of investment grade instruments. Analysed by sector, the steepest drop in trading volume took place in the banking and telecommunications sectors. Condition of the Banking System Conditions in the banking system reflected stable performance in June The bank intermediary function again showed strong results with credit expanding to Rp 1,190 trillion, representing annual expansion of 31.6% alongside decline in the NPLs ratio (Table 2.2). Similarly, total bank assets climbed to Rp 2,040.9 trillion with annual growth reaching 15.3%. Other banking indicators pointed to stable conditions overall. Net Interest Income (NII) was up from the previous month at Rp 9.6 trillion. Alongside this, Non-Performing Loans (NPLs) ratios eased slightly from the previous month to 4.1% (gross) and 1.7% (net). Capital was relatively stable compared to one month earlier with the capital adequacy ratio (CAR) and return on assets (ROA) at 16.4% and 2.5%. Table 2.2 Main Indicators of Banking System Main Indicators Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Total Aset (T Rp) 1, , , , , , , , , , , , ,040.9 Deposits (T Rp) 1, , , , , , , , , , , , ,553.4 Kredit (T Rp) , , , , , , , ,190.0 LDR (%) NPLs Gross (%) NPLs Net (%) CAR (%) NIM (%)

16 III. MONETARY POLICY RESPONSE After careful assessment of the latest developments in the global and domestic economy, the Board of Governors» Meeting convened at Bank Indonesia on 5 August 2008 decided to raise the BI Rate 25 bps or 0.25% to 9.0%. The persistently high risk of future inflationary pressure spurred by the turmoil in world oil and food prices, compounded by pressure from domestic demand, was the key to Bank Indonesia»s decision for a further rate hike in August Nevertheless, the inflationary impact of the fuel price hike has now eased. To reinforce monetary policy effectiveness, the decision to raise the BI Rate was taken in tandem with optimisation of other monetary policy instruments, such as control of exchange rate volatility and absorption of excess liquidity in Open Market Operations (OMO). Under this synergetic policy, the targeted inflation of 6.5%-7.5% in 2009 is regarded as achievable. Looking ahead, Bank Indonesia will consistently evaluate the outlook for the economy and inflation based on the latest available information in order to maintain an optimum monetary policy stance for the future. Bank Indonesia will also maintain intensive coordination with the Government in response to the various dynamics of the domestic and international economy. 14

17 Latest Indicators FINANCIAL SECTOR INTEREST RATE & STOCK One month SBI 1) Three month SBI 1) One month Deposit 2) Three month Deposit 2) One week JIBOR 2) JSX Indices 3) MONETARY AGGREGATES (billions Rp) Base Money M1(C+D) Currency (C) Demand Deposit (D) Broad Money (M2 = C+D+T) Quasi Money (T) Quasi Money (Rupiah) Time Deposit Saving Deposit Foreign Currency Deposit Broad Money Rupiah Claim on Business Sector Credit by DMBs Jul Aug 2007 Sep Oct Nov Dec Jan Feb Mar Apr May ,348,673 2,194,339 2,359,206 2,643,487 2,688, , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,255-1,472,952 1,487,541 1,512,756 1,530,145 1,556,200 1,643,203 1,588,962 1,596,090 1,586,795 1,608,874 1,636,383 1,706,365-1,075,129 1,085,506 1,101,475 1,115,149 1,131,765 1,182,361 1,168,664 1,184,763 1,167,049 1,181,846 1,197,839 1,232, , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,755-1,265,194 1,280,585 1,295,344 1,311,511 1,337,472 1,427,296 1,370,986 1,362,167 1,359,971 1,381,500 1,401,752 1,455, , , , ,837 1,009,712 1,040,996 1,026,218 1,040,616 1,075,500 1,102,596 1,137,143 1,189, , , , , , , , ,323 1,029,172 1,054,747 1,089,268 1,142, Jun Jul P R I C E S CPI - monthly (%, mtm) CPI - 1 year (%, yoy) EXTERNAL SECTOR Rp/USD (end period, mid rate) Non oil/gas Export (f.o.b, million USD) 4) Non oil/gas Import (c$f, million USD) 4) Net International Reserve (million USD) QUARTERLY INDICATOR Real GDP Growth (% y-o-y) Consumption Investment Changes in Stocks Export Import Ω 9,186 9,410 9,137 9,103 9,376 9,419 9,291 9,051 9,217 9,234 9,318 9,225 9,118 8,015 7,953 7,561 8,125 7,916 8,434 8,957 8,356 9,091 8,572 9,589 9,719-6,364 6,621 5,853 6,015 6,799 5,856 7,826 7,419 7,980 8,983 8,621 8, Tw. II Tw. III 2007* Tw. IV TOTAL Tw. I 2008 Tw. II * Provisional Figures * Using 2000 base year (BPS-Statistic Indonesia) 1) end of week 2) weighted average 3) end period closing 4) closed file Sources : Bank Indonesia, except stock market data (BAPEPAM), CPI, export/import and GDP (BPS) 15