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The BI Board of Governors Meeting agreed on 15th and 16th February 2023 to hold the BI 7-Day Reverse Repo Rate at 5.75%, while also maintaining the Deposit Facility (DF) rate at 5.00% and Lending Facility (LF) rate at 6.50%. The decision is consistent with the pre-emptive and forward-looking monetary policy stance to ensure lower inflation expectations and inflation moving forward. Bank Indonesia is confident that a BI7DRR rate of 5.75% is sufficient to maintain core inflation within the 3.0%±1% target corridor in the first semester of 2023 and return Consumer Price Index (CPI) inflation 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 proceeds of export management through the implementation of foreign exchange monetary operations using foreign exchange proceeds of exports (DHE) in accordance with market mechanisms.
In connection therewith, Bank Indonesia 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 Government, and under the Financial System Stability Committee, is strengthened continuously to maintain macroeconomic and financial system stability, while reviving lending to priority sectors to support economic growth and exports, as well as advancing the inclusive green economy and finance.
Global economic growth could potentially exceed the previous projection after China ended its zero-Covid policy. Bank Indonesia forecasts world economic growth potentially above the 2.3% projection previously. Stronger economic growth is expected in China on increasing domestic demand in response to the reopening of China's economy after the end of zero-Covid policy. Economic moderation is predicted in the United States (US) and Europe, accompanied by the high risk of recession. Meanwhile, global inflation is falling gradually on the back of the global economic downturn, coupled with improvements in the global supply chain, despite remaining high in line with international food and energy prices, which have not fallen significantly, and tight labour markets in the US and Europe. Lower inflation will bring tight monetary policy in advanced economies towards its peak, with higher policy rates for longer throughout 2023. Global financial market uncertainty has also eased, thus increasing international capital flows and alleviating currency pressures in developing economies.
Indonesia's economic growth is projected to remain strong, with potential gains driven by higher exports and improving domestic demand, primarily private consumption. Strong domestic economic growth was recorded in the fourth quarter of 2022 at 5.01% (yoy), bringing growth for the year of 2022 to 5.31% (yoy), up significantly from 3.70% (yoy) in 2021. Spatially, solid national economic growth in 2022 was supported by all regions, led by Sulawesi-Maluku-Papua (Sulampua), followed by Java, Bali-Nusa Tenggara (Balinusra), Kalimantan and Sumatra. In 2023, Bank Indonesia projects economic growth with a bias towards the upper end of the 4.5-5.3% range. Export performance could potentially exceed the previous projection due to the positive impact of economic gains in China. High household consumption growth is projected in response to growing economic confidence and greater public mobility after the Government ended community activity restrictions (PPKM). Meanwhile, investment is improving given the promising business outlook, an influx of foreign direct investment (FDI) as well as the ongoing completion of national strategic projects (PSN).
The Balance of Payments (BOP) remains sound, thereby supporting external resilience. In 2022, the BOP is projected to record a surplus, supported by a positive current account in the 0.4-1.2% of GDP range, notwithstanding a capital and financial account deficit caused by elevated global financial market uncertainty. The latest developments indicate a large trade surplus recorded in January 2023 at USD3.87 billion, influenced by persistently strong non-oil and gas exports. Foreign capital inflows to domestic financial markets have also increased, with portfolio investment recording and a net inflow totalling USD6.0 billion as of 14th February 2023. Meanwhile, the position of reserve assets in Indonesia increased to USD139.4 billion at the end of January 2023, 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 three months of imports. Overall, the BOP outlook for 2023 is good, with a manageable current account maintained in the range of a 0.4% of GDP surplus to a 0.4% of GDP deficit. Meanwhile, the capital and financial account is expected to record a surplus, supported by foreign capital inflows in the form of FDI and portfolio investment in line with the positive perception of investors concerning the promising national economic outlook and conducive domestic investment climate.
The Rupiah continues to appreciate, thus supporting economic stability. The Rupiah continues to regain value, appreciating 2.39% as of 15th February 2023 compared with the level recorded at the end of December 2022. Furthermore, Rupiah appreciation has outpaced currencies in several other developing economies, such as the Philippines (0.99%), Thailand (0.85%) and Malaysia (0.27%). 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 for investment and less global financial market uncertainty. Moving forward, Bank Indonesia expects Rupiah appreciation to continue in line with the promising economic outlook and strong economic fundamentals, thus edging down inflation further. Rupiah stabilisation policy to control imported inflation will be strengthened with foreign exchange proceeds of exports management through the implementation of foreign currency term deposit (TD) instruments using foreign exchange proceeds of exports (DHE) in accordance with market mechanisms.
Inflation is still falling and lower than expected. Low Consumer Price Index (CPI) inflation was recorded in January 2023 at 0.34% (mtm) or 5.28% (yoy), down from 5.51% (yoy) the month earlier. Lower core inflation and administered prices contributed to lower headline inflation in the reporting period, coupled with controlled inflationary pressures on volatile food (VF). Such developments are the positive result of front-loaded, pre-emptive and forward-looking monetary policy by Bank Indonesia to control inflation, reinforced by VF inflation control measures through the GNPIP movement. 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 second semester of 2023. Furthermore, Bank Indonesia will continue strengthening coordination with the Government to ensure lower and manageable inflation.
Liquidity conditions in the banking industry and economy remain ample to increase lending/financing and sustain the economic recovery. In January 2023, the ratio of liquid assets to third-party funds was still high at 29.13%. This is in line with the accommodative liquidity policy stance maintained by Bank Indonesia to support the availability of funds in the banking industry to disburse loans/financing to businesses. Liquidity in the economy also remains ample to support economic activity, as reflected by growth of the narrow money (M1) and broad money (M2) monetary aggregates at 8.5% (yoy) and 8.2% (yoy) respectively. Looking forward, Bank Indonesia will continue to maintain adequate liquidity for the national economic recovery, while preserving stability.
Interest rates in the banking industry are still conducive to economic recovery. In the money market, the IndONIA rate as of 15th February 2023 remained low at 5.47%. The yield of short-term SBN increased 100bps on the level prior to the BI7DRR hike in July 2022, while long-term yields were more stable. The 1-month term deposit rate in January 2023 was recorded at 3.95%, increasing 106bps on the level in July 2022. Meanwhile, the average lending rate in January 2023 stood at 9.25%, up 31bps on the July 2022 level in line with ample liquidity in the banking industry, which is conducive to disburse loans. In addition, BI policy support to provide macroprudential incentives in the form of Rupiah RR relief also encouraged banks to lend to priority and inclusive sectors.
The bank intermediation function maintained strong growth at the beginning of 2023. Growth of loans disbursed by the banking industry in January 2023 stood at 10.53% (yoy), moderating slightly on 11.35% (yoy) in the previous period in line with seasonal trends at the beginning of the year. Intermediation in the sharia banking industry accelerated to 20.9% (yoy) in January 2023. Robust MSME loan growth also persisted, particularly in terms of People's Business Loans (KUR) that grew 29.66% (yoy) in 2022. Strong credit growth was driven on the supply side by adequate liquidity and loose lending standards in the banking industry. Meanwhile, demand for loans/financing is supported by corporate demand, including MSMEs, and improving household consumption. Bank Indonesia will continue supporting the bank intermediation function to bolster the economic recovery.
Financial system resilience remains solid, particularly the banking industry. The Capital Adequacy Ratio (CAR) in the banking industry was still high in December 2022 at 25.63%. Strong capital contributed to low NPL ratios of 2.44% (gross) and 0.71% (nett) in December 2022. Liquidity in the banking industry in January 2023 was maintained, supported by 8.03% (yoy) growth of third-party funds. BI stress test simulations also confirmed that bank resilience has been maintained. 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.
Digital economic and financial transactions are developing rapidly and driving economic activity. This is supported by the expansion of the digital economy and convenience of the digital payment system, coupled with rapid growth of digital banking. The value of electronic money transactions in January 2023 grew 26.08% (yoy) to reach Rp36.57 trillion. The value of digital banking transactions grew 27.96% (yoy) to reach Rp4,900.6 trillion and the value of transactions using ATM cards, debit cards and credit cards increased 5.42% (yoy) to reach Rp689.09 trillion. Bank Indonesia will continue maintaining stability and enhancing the efficiency of cross-border payment transactions by strengthening policy and accelerating payment system digitalisation to maintain economic recovery momentum. Meanwhile, total currency in circulation in January 2023 increased 5.07% (yoy) to reach Rp930.05 trillion. Bank Indonesia will continue ensuring the availability of quality Rupiah currency fit for circulation throughout the territory of the Republic of Indonesia.
Monetary Policy Review - February 2023.pdf
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