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Economic and Monetary Policy Department
The BI Board of Governors Meeting agreed on 24th and 25th July 2023 to hold the BI 7-Day Reverse Repo Rate (BI7DRR) at 5.75%, while also maintaining the Deposit Facility (DF) rate at 5.00% and Lending Facility (LF) rate at 6.50%. The decision to maintain the BI7DRR rate at 5.75% is consistent with the monetary policy stance to control inflation within the 3.0%±1% target this year and 2.5%±1% in 2024. The policy focus is oriented towards strengthening rupiah stability to manage imported inflation and mitigate the contagion effect of global financial market uncertainty. Bank Indonesia is strengthening accommodative liquidity and macroprudential policies to revive lending/financing with a focus on downstreaming, housing, tourism as well as green and inclusive finance. Furthermore, Bank Indonesia is also accelerating payment system digitalisation to expand digital economic and financial inclusion. The Bank Indonesia monetary, macroprudential and payment system policy mix will remain directed towards supporting sustainable economic growth.
Bank Indonesia, therefore, has strengthened its policy mix response to maintain stability and revive growth as follows:
Policy coordination with the (central and regional) Government and strategic partners is also strengthened constantly. 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 Financial System Stability Committee is also strengthened to maintain macroeconomic and financial sector stability, while reviving lending/financing to priority sectors to support downstreaming (mineral and coal mining, agriculture, livestock and fishing) housing, tourism, inclusive sectors (MSMEs, People's Business Loans (KUR) and ultra-micro enterprises) as well as the green economy and finance. Bank Indonesia also strengthens international cooperation with other central banks and authorities in partner countries, while promoting trade and investment in priority sectors in collaboration with relevant institutions. In addition, Bank Indonesia is also strengthening synergy with relevant government ministries/agencies to ensure a successful ASEAN Chairmanship in 2023, particularly in terms of the finance track.
Global economic uncertainty remains high. Global economic growth in 2023 is still forecast at 2.7%, which is nevertheless accompanied by a rebalancing in the sources of growth. Growth in the United States (US) and several advanced economies in Europe is projected to pick up on the back of household consumption in response to increasing wages and consumer confidence. Robust economic growth is expected to persist in Japan given improving household consumption and export performance. Meanwhile, slower economic growth in China is consistent with restrained consumption and investment, particularly in the property sector. Inflationary pressures in advanced economies remain comparatively high due to stronger economic growth and tight labour markets. This is expected to trigger further monetary policy rate hikes in advanced economies, including the Federal Funds Rate (FFR). Consequently, capital flows to developing economies will become more selective, thus intensifying currency pressures in developing economies, including Indonesia, and necessitating a strong policy response to mitigate global contagion risk.
At home, economic growth in Indonesia remains solid, supported by domestic demand. The domestic economy in the second quarter of 2023 is expected to outperform the previous projection, underpinned by higher household consumption and investment. Greater mobility, improving income expectations, controlled inflation as well as the positive impact of national religious holidays (HBKN) and 13th month salary bonuses disbursed to civil servants boosted household consumption. Investment also increased, particularly non-building investment in line with positive export performance and ongoing downstreaming efforts. Meanwhile, exports of goods are expected to decelerate in line with global economic moderation, contrasting high growth of services exports caused by a surge of inbound international travellers. By sector, the main contributors to economic growth include the Manufacturing Industry, Wholesale and Retail Trade as well as Information and Communication. Spatially, national economic growth was primarily driven by strong growth in the Kalimantan and Java regions on maintained domestic demand. Consequently, national economic growth in 2023 is projected in the 4.5-5.3% range. Bank Indonesia will continue strengthening synergy between the fiscal stimuli of the Government and macroprudential stimuli of Bank Indonesia to revive economic growth, particularly on the demand side.
Indonesia's Balance of Payments (BOP) continues to support external resilience. The trade balance in the second quarter of 2023 recorded a narrower surplus due to lower international commodity prices and global economic moderation. Meanwhile, global financial market uncertainty triggered a net capital outflow in the form of portfolio investment totalling USD1.3 billion in the second quarter of 2023. Notwithstanding, a net inflow of USD0.3 billion has been recorded thus far in the third quarter of 2023 (as of 21st July 2023). At the end of June 2023, the position of reserve assets remained high at USD137.5 billion, equivalent to 6.1 months of imports or 6.0 months of imports and servicing government external debt, which is well above the international adequacy standard of around 3 months of imports. Looking ahead, BOP performance in 2023 is forecast to remain sound, supported by a manageable current account maintained in the range of a 0.4% surplus to a 0.4% deficit of GDP. In addition, the capital and financial account will be maintained on the back of foreign capital inflows in the form of foreign direct investment (FDI) and portfolio investment in line with positive investor perception concerning the national economic outlook.
Rupiah exchange rates remain under control in line with the stabilisation measures implemented by Bank Indonesia. Year to date, the rupiah has gained 3.63% (ptp) in value from the position recorded at the end of December 2022, thereby exceeding the Philippine peso (1.78%), Indian rupee (1.11%) and Thai baht (0.04%). Moving forward, as global financial market uncertainty subsides, Bank Indonesia expects rupiah appreciation to persist, fostered by solid economic growth, low inflation, attractive yields on domestic financial assets for investment and the positive impact of implementing Government Regulation 36/2023 concerning the foreign exchange proceeds of natural resources exports (DHE SDA). Investor perception concerning the national economic outlook is also improving, as reflected by an upgrade to Indonesia's sovereign credit rating by the R&I rating agency from a stable to positive outlook, with a BBB+ rating (a full two notches above the lowest investment grade category). Bank Indonesia will also continue strengthening rupiah stabilisation policy through triple intervention and the twist operation to mitigate the contagion risk of global financial market uncertainty.
Inflation returned to the target quicker than previously projected. Consumer Price Index (CPI) inflation in June 2023 stood at 3.52% (yoy), which is within the 3.0%±1% target corridor. Milder inflationary pressures were observed across all components. Core inflation in June 2023 was recorded at 2.58% (yoy), lower than 2.66% (yoy) the month earlier in line with stable exchange rates, lower international commodity prices, a weak knock-on effect of volatile food inflation and controlled inflation expectations. Volatile food (VF) inflation decreased to 1.20% (yoy) in June 2023 from 3.28% (yoy) one month earlier, while administered prices (AP) inflation also fell from 9.52% (yoy) to 9.21% (yoy) in the reporting period. Lower inflation within the target range is the positive outcome of monetary policy consistency and close synergy to control inflation between Bank Indonesia and the (central and regional) Government through the Central and Regional Inflation Control Teams (TPIP and TPID) as well as the National Movement for Food Inflation Control (GNPIP) in various regions. Bank Indonesia, therefore, is confident that inflation will remain under control in the 3.0%±1% target this year and 2.5%±1% in 2024.
Liquidity in the banking industry remains ample to revive lending/financing. In line with the accommodative liquidity policy stance of Bank Indonesia, the ratio of liquid assets to third-party funds was still high in June 2023 at 26.73%. Ample liquidity is having a positive impact on interest rates in the banking industry. In the money market, the IndONIA rate as of 24th July 2023 remained low at 5.61%. In the bond market, the yield of short-term SBN was recorded at 5.99%, while long-term yields stood at 6.22% on the same date. In the banking industry, the 1-month term deposit rate and average lending rate in June 2023 were also recorded low at 4.14% and 9.34% respectively. Bank Indonesia will continue ensuring adequate liquidity to maintain financial system stability and revive lending/financing for a faster national economic recovery.
The bank intermediation moderated on weaker corporate demand for loans. Amid loose supply-side conditions due to ample liquidity, high loan disbursement plans and loose lending standards in the banking industry, the corporate sector is accelerating loan repayments while maintaining a wait-and-see attitude in terms of increasing future investment plans. Growth of loans disbursed by the banking industry in June 2023 was recorded at 7.76% (yoy), primarily supported by Corporate Services, Social Services and Mining. Intermediation in the sharia banking industry increased 17.09% (yoy) in June 2023. In the MSME segment, the growth trend was maintained, achieving 7.34% (yoy) in June 2023. Bank Indonesia remains committed to stimulating bank lending/financing on the supply side to accelerate sustainable economic growth. To that end, macroprudential liquidity incentive policy is focused on sectors with a stronger multiplier effect on economic growth and job creation, particularly in downstream sectors (mineral and coal mining, agriculture, livestock and fishing), housing (including affordable housing), tourism, inclusive sectors (including MSME loans, People's Business Loans (KUR) and ultra-micro loans) as well as the green economy and finance. Bank Indonesia projects credit growth in 2023 in the 9-11% (yoy) range.
Financial system resilience remains solid, particularly the banking industry. The Capital Adequacy Ratio (CAR) in the banking industry was still high in May 2023 at 26.07%. Credit risk was also mitigated effectively, as reflected by low NPL ratios of 2.52% (gross) and 0.77% (nett) in May 2023. Liquidity in the banking industry in June 2023 was maintained, supported by 5.79% (yoy) growth of third-party funds (TPF). BI stress tests further confirmed solid bank resilience in Indonesia. Meanwhile, 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 and economic recovery momentum.
Digital economic and financial transactions continue to perform solidly, supported by a secure, uninterrupted and reliable payment system. The value of electronic money transactions in the second quarter of 2023 increased 14.82% (yoy) to reach Rp111.35 trillion, while the value of digital banking transactions grew 11.6% (yoy) to Rp13,827 trillion. The value of QRIS transactions continues to enjoy strong 104.64% (yoy) growth, amounting to Rp49.65 trillion, with users and merchants totalling 37.0 million and 26.7 million respectively, dominated by MSMEs. Bank Indonesia continues accelerating payment system digitalisation for greater economic and financial inclusion and cross-border cooperation. Meanwhile, the value of card-based payments using ATM, debit and credit cards reached Rp2,115.57 trillion in the reporting period, with growth of 3.0% (yoy). In terms of rupiah currency management, total currency in circulation in the second quarter of 2023 grew 8.74% (yoy) to Rp992.2 trillion. Bank Indonesia continues ensuring the availability of rupiah currency fit for circulation in all regions of the Republic of Indonesia, which includes maintaining institutional cooperation to circulate the rupiah in 3T (outermost, frontier, remote) regions through mobile cash services, cash deposit services and the Sovereign Rupiah Expedition.
Jakarta, 25th July 2023
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Monetary Policy Report - Quarter II 2023
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