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The BI Board of Governors Meeting agreed on 18th and 19th January 2023 to raise the BI 7-Day Reverse Repo Rate (BI7DRR) by 25 bps to 5.75%, while also raising the Deposit Facility (DF) and Lending Facility (LF) rates by 25 bps to 5.00% and 6.50%, respectively. The more calculated decision to raise the policy rate is a front-loaded, pre-emptive and forward-looking follow-up measure to continue lowering inflation expectations and inflation moving forward. Bank Indonesia is confident that raising the BI 7-Day Reverse Repo Rate (BI7DRR) 225bps since August 2022 to 5.75% is sufficient to ensure core inflation remains within the 3.0%±1% target corridor in the first semester of 2023 and Consumer Price Index (CPI) inflation returns to the 3.0%±1% target in the second semester of 2023. Rupiah stabilisation policy to control imported inflation has been strengthened with foreign exchange monetary operations, including the implementation of foreign currency term deposit (TD) instruments using foreign exchange proceeds of exports (DHE) in accordance with market mechanisms.
Bank Indonesia continuously strengthens its policy mix response to maintain economic recovery momentum and stability as follows:
Policy coordination with the (central and regional) Government and strategic partners is also constantly strengthened. To that end, coordination within the Central and Regional Inflation Control Teams (TPIP and TPID) is maintained by strengthening the National Movement for Food Inflation Control (GNPIP) in various regions. Furthermore, policy synergy between Bank Indonesia and the Government, and under the Financial System Stability Committee, is constantly strengthened to maintain macroeconomic and financial system stability, while reviving lending to priority sectors to support economic growth and exports, while increasing the inclusive green economy and finance.
Global economic moderation is deepening beyond the previous projection. Global economic headwinds stem from political fragmentation, underdeveloped economies and aggressive monetary policy tightening in advanced economies. Projections for economic growth have experienced significant corrections, accompanied by increasing risk of potential recessions in the United States (US) and Europe. Nevertheless, the scrapping of zero-Covid policy in China is expected to help abate the global economic slowdown. Overall, Bank Indonesia has lowered its projection for world economic growth in 2023 to 2.3% from 2.6% previously. There are early indications of milder global inflationary pressures in response to global economic moderation, with high inflation nonetheless persisting on the back of soaring energy and food prices, ongoing supply chain disruptions and a tight labour market, particularly in the US and Europe. As inflationary pressures fade, monetary policy tightening in advanced economies is approaching its peak, with interest rates predicted to remain high throughout 2023. Global financial market uncertainty has also begun to ease, thus increasing global capital flows to developing economies. In addition, currency pressures in developing economies are also subsiding.
At home, the national economy continues to improve on solid domestic demand. Economic growth in 2022 is projected with a bias towards the upper bound of the 4.5-5.3% range, driven by strong export performance along with improving household consumption and non-building investment. In 2023, the domestic economy is forecast to continue expanding, despite moderating slightly towards the midpoint of the 4.5-5.3% range in line with the weaker world economic outlook. Household consumption is expected to accelerate given greater public mobility after the Government ended community activity restrictions (PPKM). Investment is also predicted to improve in response to the promising business outlook, an influx of foreign direct investment (FDI) and the ongoing completion of national strategic projects (PSN). Slower export growth is anticipated due to the global economic slowdown, which will be offset, however, by growing demand from China. By sector, the outlook for the Manufacturing Industry, Wholesale and Retail Trade, Information and Communication, as well as Construction is solid, driven by increasing domestic demand. Meanwhile, strong economic growth is projected in all regions of the archipelago in line with improving domestic demand.
A Balance of Payments (BOP) surplus is projected, thus supporting external resilience. In 2022, the current account surplus is projected in the 0.4-1.2% of GDP range, thus exceeding the capital and financial account deficit caused by global financial market uncertainty. The position of reserve assets in Indonesia remained high at the end of December 2022, namely USD137.2 billion, equivalent to 6.0 months of imports or 5.9 months of imports and servicing government external debt, which is well above the international adequacy standard of around 3 months of imports. In 2023, BOP performance will remain manageable, projected in the range of a 0.4% of GDP surplus to a 0.4% of GDP deficit. Meanwhile, a surplus in capital and financial account is projected, supported by foreign capital inflows in the form of FDI and portfolio investment given the positive perception of investors concerning the promising national economic outlook. These developments have been confirmed by foreign capital inflows returning to domestic financial markets at the beginning of 2023, with portfolio investment recording a net inflow totalling USD4.6 billion as of 17th January 2023.
Rupiah appreciation is supported by economic stability. The rupiah has regained value at the beginning of 2023, with appreciation reaching 3.18% (ptp) and 1.20% on average as of 18th January 2023 compared with the December 2022 level. Furthermore, rupiah appreciation has outpaced currencies in several other developing economies, such as the Philippines (2.08% ytd), Malaysia (2.04% ytd) and India (1.83% ytd). The stronger rupiah is in response to foreign capital inflows to domestic financial markets given the positive perception of investors concerning the promising domestic economic outlook, accompanied by maintained stability, attractive yields on domestic financial assets and slightly less global financial market uncertainty. Moving forward, Bank Indonesia expects rupiah appreciation to continue as the economic outlook improves, thus easing inflationary pressures further. Rupiah stabilisation policy to control imported inflation has been strengthened with foreign exchange monetary operations, including the implementation of foreign currency term deposit (TD) instruments using foreign exchange proceeds of exports (DHE) in accordance with market mechanisms.
Inflation is falling faster than expected. Consumer Price Index (CPI) inflation at the end of 2022 stood at 5.51% (yoy), significantly below the Consensus Forecast projection of 6.5% (yoy) after subsidised fuel prices were adjusted in September 2022. Similarly, low core inflation was maintained at the end of 2022 at 3.36% (yoy), below the Bank Indonesia projection of 4.61% (yoy). Lower CPI and core inflation are the result of close coordination between the Government and Bank Indonesia through a front-loaded, pre-emptive and forward-looking monetary policy response, supported by various control measures targeting volatile food (VF) inflation through the National Movement for Food Inflation Control (GNPIP). Moving forward, Bank Indonesia is confident core inflation will remain at the 3.0%±1% target during the first semester of 2023 and CPI inflation will return to the 3.0%±1% target in the latter half of the year. Furthermore, Bank Indonesia will continue to strengthen its monetary policy response, accompanied by close coordination with the Government to ensure lower and manageable inflation.
Liquidity conditions in the banking industry and economy remain ample to increase lending and sustain the economic recovery. In December 2022, the ratio of liquid assets to third-party funds was still high at 31.20%, up from 30.42% the month earlier, thus supporting the availability of funds for banks to disburse business loans/financing. This is also in line with the accommodative liquidity policy stance maintained by Bank Indonesia. Liquidity in the economy remains ample to support economic activity, as reflected by growth of the narrow money (M1) and broad money (M2) monetary aggregates at 9.5% (yoy) and 8.3% (yoy) respectively. Looking forward, Bank Indonesia will continue to maintain adequate liquidity for the national economic recovery, while preserving stability.
The banking industry is raising interest rates, which nevertheless remain conducive to economic recovery. In the money market, the IndONIA rate as of 18th January 2023 increased 222bps on the final level prior to the BI7DRR hike in July 2022 to reach 5.02%, which is consistent with the higher BI7DRR and strengthening of Bank Indonesia’s Monetary Operations strategy. Short-term SBN yields increased 55bps, while long-term yields were more stable. The 1-month term deposit rate in December 2022 was recorded at 3.97%, up 108bps on the July 2022 level, while lending rates in December 2022 averaged 9.15%, increasing 21bps on the July 2022 level. Rising interest rates in the banking industry were limited by ample liquidity, including Bank Indonesia policy support to provide macroprudential incentives in the form of lower reserve requirements (RR) for banks disbursing loans to priority and inclusive sectors. Meanwhile, Bank Indonesia will continue urging banks to form efficient, accommodative and competitive interest rates to support the economic recovery.
The bank intermediation function continued to improve in 2022, with the trend expected to persist in 2023. Growth of loans disbursed by the banking industry in December 2022 stood at 11.35% (yoy), up significantly from 5.24% (yoy) in the previous year. Broad-based credit growth was reported across all economic sectors and loan types, particularly investment loans and working capital loans. Intermediation in the sharia banking industry also maintained recovery momentum, with growth accelerating to 20.1% (yoy) in December 2022 compared with 6.6% (yoy) one year earlier. Robust MSME loan growth also persisted, particularly in terms of People’s Business Loans (KUR) that grew 29.66% (yoy) in the reporting period. On the supply side, a stronger intermediation function was supported by ample liquidity and lending standards that remain loose in the banking industry. Improving corporate performance and household consumption are driving demand for financing. Moving forward, Bank Indonesia will maintain accommodative, inclusive and sustainable macroprudential policy to revive bank lending to priority sectors still impacted by the pandemic, and to increase disbursements of People’s Business Loans (KUR) and green finance to support the economic recovery. Based on such developments and in conjunction with policy synergy among the authorities, financial sector and business community, credit growth in 2023 is projected in the 10-12% (yoy) range.
Financial system resilience remains solid, particularly the banking industry, in terms of capital and liquidity. The Capital Adequacy Ratio (CAR) in the banking industry was still high in November 2022 at 25.45%. Strong capital is contributing to minimise credit risk, as reflected by low NPL ratios of 2.65% (gross) and 0.75% (nett) in November 2022. Meanwhile, liquidity in the banking industry was maintained in December 2022, supported by 9.01% (yoy) growth of third-party funds. Meanwhile, BI stress test simulations confirmed that bank resilience has been maintained. Bank Indonesia will continue strengthening synergy with the Financial System Stability Committee to mitigate various domestic and global macroeconomic risks that could undermine financial system resilience.
Bank Indonesia continues to maintain stability and increase efficiency by strengthening payment system policy and accelerating digitalisation to sustain economic recovery momentum. In 2022, digital economic and financial transactions increased rapidly in line with greater public acceptance and growing public preference towards online retail as well as the convenience of the digital payment system and the speed of digital banking. The value of electronic money transactions in 2022 grew 30.84% (yoy) to reach Rp399.6 trillion, which is projected to increase 23.90% (yoy) in 2023 to a level of Rp495.2 trillion. Meanwhile, the value of digital banking transactions increased 28.72% (yoy) to reach Rp52,545.8 trillion, which is projected to increase 22.13% (yoy) in 2023 to a level of Rp64,175.1 trillion. On the other hand, currency in circulation in December 2022 expanded 6.95% (yoy) to reach Rp1,026.5 trillion. In 2023, Bank Indonesia will continue nurturing payment system innovation, while ensuring the availability of quality rupiah currency fit for circulation throughout the territory of the Republic of Indonesia, including frontier, outermost, and disadvantaged (3T) areas.
Jakarta, 19th January 2023
Head of Communication Department
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BI 7-Day Reverse Repo Rate Held at 5.75%: Synergy Maintaining Stability and Reviving Growth