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Economic and Monetary Policy Department
The BI Board of Governors agreed on 16th and 17th November 2022 to raise the BI 7-Day Reverse Repo Rate (BI7DRR) by 50bps to 5.25%, while also raising the Deposit Facility (DF) and Lending Facility (LF) rates by 50bps to 4.50% and 6.00% respectively. The decision to raise the policy rate was taken as a front-loaded, pre-emptive and forward-looking measure to lower inflation expectations, which are currently overshooting and return core inflation to the 3.0%±1% target range earlier, specifically in the first half of 2023, while simultaneously strengthening exchange rate stabilisation policy in line with the rupiah's fundamental value in response to the strong US dollar and elevated global financial market uncertainty amid strong and growing domestic economic demand.
Bank Indonesia also continues to strengthen its policy mix response to maintain stability and strengthen economic recovery as follows:
Policy coordination among the central government, regional governments, and strategic partners within the Central and Regional Inflation Control Teams (TPIP and TPID) is constantly strengthened through the implementation of National Movement for Food Inflation Control (GNPIP) in various regions. Policy synergy between Bank Indonesia and government fiscal policy, as well as with the Financial System Stability Committee, is also being strengthened to maintain macroeconomic and financial system stability, while reviving lending to businesses in priority sectors to stimulate economic growth and exports, while increasing economic and financial inclusion. Bank Indonesia has also strengthened international cooperation with other central banks and financial authorities, while promoting investment and trade in priority sectors in synergy with relevant institutions.
The global economy is prone to moderation, accompanied by intense inflationary pressures, aggressive monetary policy rate hikes and financial market uncertainty. Global economic growth in 2023 is expected to decelerate compared with conditions in 2022, with lower correction risk and high risk of recession in several jurisdictions, including the United States and Europe. Global economic moderation stems from ongoing geopolitical tensions that have triggered economic, trade and investment fragmentation, and prompted more aggressive tightening of monetary policy. Meanwhile, intense inflationary pressures and high core inflation globally still pose a threat in line with supply chain disruptions and labour market rigidity, predominantly in the US and Europe, amid compressed global demand. In response, central banks in many jurisdictions continue to tighten monetary policy more aggressively. A higher for longer federal funds rate (FFR), which is expected to last into the beginning of 2023 (higher for longer), is strengthening the US dollar, thus inducing depreciatory pressures in various economies. Currency pressures are escalating with increasing global financial market uncertainty. The outflows of foreign portfolio investment exacerbate exchange rate pressures in EMEs, including Indonesia.
At home, the national economic recovery remains intact. Economic performance in Indonesia strengthened in the third quarter of 2022, with growth accelerating to 5.72% (yoy) from 5.45% (yoy) in the previous period, supported by improving domestic demand and solid export performance. National economic improvements were also reflected in the main economic sectors, namely the manufacturing industry, transportation and storage as well as wholesale and retail trade. Spatially, economic gains were supported by growth in all regions of the archipelago, led by Sulawesi-Maluku-Papua (Sulampua), followed by Bali-Nusa Tenggara (Balinusra), Java, Kalimantan and Sumatra. Several early indicators in October 2022 and the latest surveys conducted by Bank Indonesia, including consumer confidence, retail sales and the Manufacturing Purchasing Managers Index (PMI), confirm that the domestic economic recovery process remains intact. Externally, solid export performance is expected to endure, specifically in terms of coal, crude palm oil (CPO), iron and steel, as well as export services, in line with strong demand in several key trading partners and strong government policy support. Consequently, economic growth in 2022 is projected with a bias towards the upper bound of Bank Indonesia's 4.5-5.3% projection. Meanwhile, strong economic growth is still projected for 2023 on the back of solid domestic demand and positive export performance despite the risks posed by deeper global economic moderation.
Indonesia's Balance of Payments (BOP) remains sound, thereby strengthening external resilience. The current account in the third quarter of 2022 is projected to record a larger surplus compared with conditions in the previous period, supported by strong non-oil and gas export performance. In contrast, the capital and financial account is expected to record a deficit in line with foreign capital outflows, primarily in the form of portfolio investment, against a backdrop of strong foreign direct investment (FDI). Entering the fourth quarter of 2022, a positive trade balance was maintained, amassing a USD5.7 billion surplus in October 2022. Pressures on foreign capital flows are persistent, with portfolio investment in the fourth quarter of 2022 (as of 15th November 2022) recording a net outflow of USD0.3 billion. The position of reserve assets in Indonesia at the end of October 2022 stood at USD130.2 billion, equivalent to 5.8 months of imports or 5.6 months of imports and servicing government external debt, which is well above the 3-month international adequacy standard. Overall, Bank Indonesia expects to maintain BOP performance in 2022, with a positive current account in the 0.4-1.2% of GDP range, coupled with a sound capital and financial account, dominated by FDI. Strong BOP performance is projected for 2023, supported by a solid current account and capital and financial account, notwithstanding the persistent risk of uncertainty blighting global financial markets.
The strong US dollar and elevated global financial market uncertainty are intensifying broad-based depreciatory pressures on all currencies globally, including the rupiah. The US dollar (DXY) Index stood at 106.28 on 16th November 2022, increasing 11.09% (ytd) in 2022. Meanwhile, thanks to the stabilisation measures implemented by Bank Indonesia, the rupiah depreciated just 8.65% (ytd) as of 16th November 2022 compared with the level recorded at the end of 2021, which is comparatively lower than the currency depreciation experienced in neighbouring countries, such as South Korea 10.30% (ytd) and the Philippines 11.10% (ytd). The strong US dollar stems from aggressive monetary policy tightening in the US and a rebalancing of capital from various jurisdictions to the US amid economic moderation and soaring inflation in Europe. At the same time, elevated global financial market uncertainty persists. Moving forward, Bank Indonesia will continue to strengthen rupiah stabilisation policy in line with market mechanisms and the currency's fundamental value in order to support measures to manage inflation and maintain macroeconomic stability.
Inflation expectations remain high notwithstanding a lower Consumer Price Index (CPI) than previously projected. CPI inflation in October 2022 stood at 5.71% (yoy), which is still above the 3.0%±1% target corridor, yet below the previous projection and the 5.95% (yoy) recorded one month earlier. Volatile food (VF) inflation decreased to 7.19% (yoy) but requires strong policy synergy and coordination through the TPIP-TPID teams and GNPIP movement to continue the downward trend. Inflationary pressures on administered prices (AP) stood at 13.28% (yoy), thus requiring strong coordination to mitigate the second-round effect of fuel price hikes and higher airfares. Meanwhile, core inflation increased to 3.31% (yoy) in response to the second-round effect of fuel price hikes and higher inflation expectations. The Consensus Forecast published in November 2022 pointed to high inflation expectations at the end of 2022, namely 5.9% (yoy), despite retreating from 6.7% (yoy) the month earlier. Consequently, Bank Indonesia will strengthen its monetary policy response to lower inflation expectations, which are currently overshooting, while ensuring core inflation returns to the 3.0%±1% target range earlier, specifically in the first half of 2023.
Liquidity in the banking industry is increasing and adequate to support intermediation. In October 2022, the ratio of liquid assets to third-party funds remained high and increased to 29.46%. Liquidity conditions in the economy are loose, as reflected by 14.9% (yoy) and 9.8% (yoy) growth of narrow money (M1) and broad money (M2) aggregates respectively. Meanwhile, implementing the Joint Decree between Bank Indonesia and the Ministry of Finance, BI continues to purchase SBN in the primary market to fund the national economic recovery and finance the health and humanitarian aspects of the Covid-19 pandemic, totalling Rp142.35 trillion as of 15th November 2022. Ample liquidity is also helping to drive the economic recovery.
Transmission of the higher policy rate has raised money market rates amid interest rate rigidity in the banking industry. In the markets, the IndONIA rate increased 150bps from the end of July 2022 to 4.30% on 16th November 2022 in line with the higher BI7DRR and strengthening the monetary operations strategy of Bank Indonesia. Short-term SBN yields are up 143bps, coupled with relatively stable long-term SBN yields. Meanwhile, lending rates and funding costs in the banking industry are experiencing rigidity. The 1-month term deposit rate in October 2022 increased to 3.40% from 2.89% in July 2022, while the lending rate in October 2022 increased slightly to 9.09% from 8.94% in July 2022. Lending rates are experiencing rigidity in line with loose liquidity conditions that are prolonging the lag effect of policy rate transmission to lending and funding rates.
The bank intermediation function continues to improve and support the economic recovery. Growth of outstanding loans disbursed by the banking industry in October 2022 stood at 11.95% (yoy), boosted by all loan types and nearly all economic sectors. Intermediation in the sharia banking industry also continues to recover, with growth recorded at 18.4% (yoy) in October 2022. On the supply side, a stronger intermediation function was supported by lending standards that remain loose in the banking industry given the improving appetite to disburse loans, primarily to the manufacturing industry, trade sector and agriculture. On the demand side, an ongoing corporate and household sector recovery is driving intermediation. Corporate sector performance is reflected by improving repayment capacity, sales and capital expenditures (CapEx), particularly in the trade and mining sectors. Household performance is indicated by improving consumption and investment in line with consumer optimism. In terms of micro, small and medium enterprises, MSME loan growth was recorded at 17.50% (yoy) in October 2022. Bank Indonesia continues to monitor various domestic and global macroeconomic risks that could spill over into the financial system, while strengthening synergy with the Financial System Stability Committee to maintain the stability of the financial system.
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 September 2022 at 25.09%. Strong capital is helping to minimise credit risk, as reflected by low NPL ratios of 2.78% (gross) and 0.77% (nett). Liquidity in the banking industry was maintained in October 2022, supported by 9.41% (yoy) growth of third-party funds, up on the previous period in line with a net fiscal expansion. Third-party funds increased in the corporate and household sectors in line with the ongoing national economic recovery. Meanwhile, BI simulations confirmed that bank resilience has been maintained, yet the potential impact of several risk factors stemming from domestic macroeconomic conditions and global economic turmoil demand vigilance.
Bank Indonesia continues to improve payment system efficiency by strengthening payment system policy and accelerating payment system digitalisation to support inclusive economic growth. Digital economic and financial transactions continue to increase in line with greater public acceptance and growing public preference towards online retail as well as the expansion and convenience of the digital payment system and accelerating digital banking. The value of electronic money transactions grew 20.19% (yoy) in October 2022 to reach Rp35.1 trillion, while the value of digital banking transactions increased 38.38% (yoy) to reach Rp5,184.1 trillion as public mobility continues to normalise. Meanwhile, the value of transactions using ATM cards, debit cards and credit cards increased 23.52% (yoy) to reach Rp691.6 trillion in the reporting period. In terms of cash, currency in circulation increased 6.04% (yoy) to reach Rp905.9 trillion in October 2022. Bank Indonesia continues to ensure the availability of quality rupiah currency fit for circulation throughout the territory of the Republic of Indonesia.
Monetary Policy Review - November 2022 .pdf
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