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The BI Board of Governors Meeting agreed on 20th and 21st July 2022 to hold the BI 7-Day Reverse Repo Rate at 3.50%, while also maintaining the Deposit Facility (DF) rates at 2.75% and Lending Facility (LF) rates at 4.25%. The decision is consistent with projections of manageable core inflation despite the risks posed by global economic moderation on domestic economic growth. Bank Indonesia continues to remain vigilant of rising inflation expectations and core inflation moving forward, while strengthening the optimal monetary policy mix response necessary through rupiah stabilisation measures, strengthening monetary operations and interest rates. Towards that end, Bank Indonesia is bolstering its policy mix as follows:
Bank Indonesia is also strengthening coordination with the central and regional governments as well as relevant institutions through national and regional inflation control teams (TPIP and TPID) to manage inflationary pressures on the supply side and bolster production to support food security. Furthermore, Bank Indonesia continues to build monetary and fiscal policy coordination with the Government to maintain macroeconomic stability and support the national economic recovery process. Similarly, Bank Indonesia continues to strengthen policy synergy with the Financial System Stability Committee to maintain macroeconomic and financial system stability, while reviving lending to businesses in priority sectors to support economic growth, exports as well as economic and financial inclusion.
The global economy is expected to expand more slowly than previously projected amid the growing risk of stagflation and elevated global financial market uncertainty. Global inflationary pressures continue to intensify in response to high commodity prices caused by supply chain disruptions given the ongoing geopolitical tensions between Russia and Ukraine, coupled with the proliferation of inward-looking policies, particularly in terms of food. In response to persistently high inflation, several countries, particularly the United States, have tightened monetary policy more aggressively, thus impeding the economic recovery and exacerbating the risk of stagflation. Economic growth in several jurisdictions, including the US, Europe, Japan, China and India, has been revised downwards, accompanied by growing recession concerns in the US. Consequently, the global economic growth projection for 2022 has been downgraded from 3.5% to 2.9%. Furthermore, global financial market uncertainty remains high, thus restraining foreign capital flows and intensifying currency pressures in developing economies, including Indonesia.
At home, the domestic economic improvements remain intact despite the impact of global economic moderation demanding careful vigilance. In the second quarter of 2022, the domestic economy is expected to post gains on the back of increasing consumption and non-building investment as well as stronger export performance than previously projected. Several early indicators in June 2022 and the latest BI surveys, including consumer confidence, retail sales and the Manufacturing Purchasing Managers Index (PMI), confirmed that the domestic economic recovery process remains intact. Externally, export performance is stronger than previously projected, particularly in terms of coal, metalliferous ores and iron and steel, supported by persistently strong export demand and high international commodity prices. Economic growth is underpinned by improvements in several economic sectors, led by the Manufacturing Industry, Trade as well as Transportation and Storage. Spatially, recent economic gains have been supported by all regions of the Indonesian archipelago, particularly Java, Sumatra and Sulawesi-Maluku-Papua (Sulampua). Moving forward, Bank Indonesia expects the domestic economic recovery to endure on increasing mobility, sources of finance and business activity. Notwithstanding, global economic moderation could impact export performance, while higher inflation could stifle private consumption. Economic growth in 2022, therefore, is projected with a bias towards the lower end of Bank Indonesia's projected range of 4.5-5.3%.
Indonesia's Balance of Payments (BOP) remains solid despite a build-up of pressure on capital flows. The current account is expected to maintain a surplus in the second quarter of 2022, thus extending the surplus recorded in the previous period, primarily supported by a larger non-oil and gas trade surplus given persistently high international commodity prices. The capital and financial account remains solid in line with capital inflows in the form of foreign direct investment (FDI). Meanwhile, portfolio investment in the second quarter of 2022 recorded a net inflow totalling USD0.2 billion. Entering the third quarter of 2022 (as of 19th July 2022), however, portfolio investment recorded a net outflow of USD2.0 billion in response to elevated global financial market uncertainty. The position of reserve assets in Indonesia at the end of June 2022 stood at USD136.4 billion, equivalent to 6.6 months of imports or 6.4 months of imports and servicing government external debt, which is well above the 3-month international adequacy standard. BOP performance in 2022 will be maintained in line with a current account projected range at surplus 0.3% - deficit 0.5% of GDP due to persistently high international commodity prices. In addition, BOP performance in 2022 will also be supported by the capital and financial account, primarily in the form of FDI due to the conducive domestic investment climate.
The rupiah faces increasing depreciatory pressures, similar to other regional currencies, amid persistent global financial market uncertainty. As of 20th July 2022, the rupiah depreciated 0.60% (ptp) on the level recorded at the end of June 2022, yet volatility remains low. The rupiah is losing value due to persistently high global financial market uncertainty caused by aggressive monetary policy normalisation in several jurisdictions in response to escalating inflationary pressures and concerns stoked by global economic moderation, despite Indonesia's positive economic outlook. As of 20th July 2022, therefore, the rupiah depreciated 4.90% (ytd) on the level recorded at the end of 2021, which is nonetheless comparatively lower than the currency depreciation experienced in other developing economies, such as Malaysia (6.41%), India (7.07%) and Thailand (8.88%). Moving forward, Bank Indonesia will continue to monitor forex supply and strengthen rupiah stabilisation policy in line with market mechanisms and economic fundamentals, thereby supporting efforts to manage inflation and maintain macroeconomic stability.
Inflation is rising due to supply-side pressures in line with higher international commodity prices and supply chain disruptions. The Consumer Price Index (CPI) in June 2022 recorded 0.61% (mtm) inflation, or 4.35% (yoy) annually, up from 3.55% (yoy) the month earlier. Core inflation remains under control at 2.63% (yoy) in line with policy consistency by Bank Indonesia to anchor inflation expectations. Meanwhile, volatile food inflation was edged upwards primarily by global food prices and supply disruptions caused by inclement weather. Inflationary pressures on administered prices remain high as a result of airfares and energy prices. Looking ahead, CPI inflation is expected to increase on global energy and food prices. In 2022, therefore, headline inflation is predicted to exceed the target corridor before returning to 3.0%±1% in 2023. Bank Indonesia continues to strengthen policy coordination with different levels of Government through national and regional inflation control teams (TPIP and TPID).
Bank Indonesia continues to normalise liquidity policy by raising rupiah reserve requirements gradually and maintaining the RR incentive without disrupting liquidity conditions or the intermediation function in the banking industry. Incremental adjustments to rupiah reserve requirements and RR incentives provided from 1st March-15th July 2022 have absorbed approximately Rp219 trillion of liquidity in the banking industry. The liquidity absorption measures have not, however, undermined the banking industry's ability to disburse loans/financing to businesses or participate in purchasing SBN to finance the State Revenue and Expenditure Budget (APBN). Bank lending to businesses continues to recover with ample liquidity maintained. In June 2022, the ratio of liquid assets to third-party funds remained high at 29.99%, thus supporting the banking industry's ability to disburse loans. Meanwhile, implementing the Joint Decree of the Minister of Finance and Governor of Bank Indonesia, Bank Indonesia continues to purchase SBN in the primary market to fund the national economic recovery and finance the health and humanity aspects of the Covid-19 pandemic, totalling Rp56.11 trillion as of 20th July 2022. Furthermore, liquidity in the economy remained ample in June 2022, as reflected by narrow money (M1) and broad money (M2) aggregates, which grew 16.60% (yoy) and 10.64% (yoy) respectively.
The banking industry continues to reduce interest rates in line with improving risk perception. In the markets, the IndONIA rate was fairly stable in June 2022 at 2.80% compared with conditions in June 2021, while the 1-month deposit rate fell 69bps from June 2021 to 2.81% in June 2022. In the credit market, the banking industry lowered lending rates by 58bps in the same period to 8.94% as risk perception continued to improve. Nevertheless, Bank Indonesia still acknowledges a further opportunity for the banking industry to increase lending/financing, including through lower lending rates, to hasten the national economic recovery.
Financial system resilience remains solid, accompanied by a revival of the bank intermediation function. The Capital Adequacy Ratio (CAR) in the banking industry remained high in May 2022 at 24.67%, with persistently low NPL ratios of 3.04% (gross) and 0.85% (nett). Bank intermediation continued to improve in June 2022, with deposit growth recorded at 9.13% (yoy) and credit growth improving to 10.66% (yoy), primarily driven by productive loans, namely working capital loans and investment loans, as well as most economic sectors. On the supply side, the banking industry maintained looser lending standards, primarily in the Manufacturing, Trade and Agricultural sectors in line with lower credit risk perception. On the demand side, the corporate recovery remains intact, as confirmed by improving sales, particularly in the Trade sector and Manufacturing Industry, thus increasing corporate demand for bank funding, repayment capacity and capital expenditures (CapEx). Meanwhile, MSME loan growth accelerated to 17.37% (yoy) in June 2022. Bank Indonesia still urges the banking industry to increase lending to priority and inclusive sectors, while strengthening synergy with the Government, other authorities and the business community to accelerate the intermediation recovery and strengthen economic recovery momentum. Based on current developments and ongoing efforts, Bank Indonesia has upgraded its projection of credit growth for 2022 to 9.0-11.0% (yoy), accompanied by loose liquidity conditions in the banking industry.
Bank Indonesia is strengthening payment system policy to accelerate financial inclusion and economic recovery. Digital economic and financial transactions are developing rapidly in line with greater public acceptance and growing public preference towards online retail as well as the expansion and convenience of digital payments and digital banking. The value of electronic money transactions grew 39.85% (yoy) in the second quarter of 2022 and the value of digital banking transactions climbed 38.45% (yoy) in the same period. Bank Indonesia is strengthening coordination and collaboration with the National Working Group to Accelerate and Expand Local Digitalisation (P2DD) in order to accelerate regional digitalisation and support local economic growth. In addition, Bank Indonesia has launched payment system regulatory reform by relaxing digital financial services (DFS) regulations in order to expand access to finance and accelerate financial inclusion. In terms of cash, currency in circulation expanded 9.36% (yoy) in the second quarter of 2022. Meanwhile, Bank Indonesia continues to ensure the availability of quality rupiah currency fit for circulation throughout the territory of the Republic of Indonesia, including the distribution of rupiah banknotes and coins to 3T (outlying, frontier, remote) regions, while strengthening educational efforts concerning Rupiah Love, Pride and Understanding.
Jakarta, 21st July 2022
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