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The BI Board of Governors agreed on 22nd and 23rd August 2022 to raise the BI 7-day Reverse Repo Rate by 25 bps to 3.75%, while also raising the Deposit Facility (DF) and Lending Facility (LF) rates by 25 bps to 3.00% and 4.50%. The decision to raise the policy rate represents a pre-emptive and forward-looking measure to mitigate the risks posed by rising core inflation and inflation expectations caused by higher non-subsidised fuel prices and a build-up of inflationary pressures on volatile food, while strengthening exchange rate stabilisation policy in line with the rupiah's fundamental value amid persistently elevated global financial market uncertainty and stronger domestic economic growth momentum. Bank Indonesia continues to strengthen its policy mix response to maintain stability and strengthen recovery as follows:
Bank Indonesia continues to strengthen international policy by expanding cooperation with other central banks and authorities in partner countries, while promoting investment and trade in priority sectors in synergy with other relevant institutions as well as ensuring the success of the six priority agendas in the Finance Track of Indonesia's G20 Presidency in 2022. Policy synergy between Bank Indonesia, the Government and Financial System Stability Committee is constantly strengthened to maintain macroeconomic and financial system stability as well as revive loans/financing to businesses in priority sectors to support economic growth, exports and economic and financial inclusion.
The global economy is expected to expand more slowly than previously projected, accompanied by the increasing risk of stagflation and persistently high financial market uncertainty. Economic growth in several countries, including the United States and China, is potentially lower than previously projected, coupled with the growing risk of stagflation in several jurisdictions and even recessions in several advanced economies in response to tightening monetary policy aggressively. Various early indicators in July 2022 pointed to moderating consumption and manufacturing performance in the US, Europe and China. Meanwhile, heightened global inflationary pressures persist given ongoing geopolitical tensions and inward-looking policies, accompanied by limited improvements in terms of supply chain disruptions. World trade volume is also forecast below the previous projection in line with global economic moderation. Consistent with such developments, global financial market uncertainty remains elevated amid ongoing measures in various economies to tighten monetary policy, including the US, though less aggressively than previously expected. This continues to restrain foreign capital flows and intensify currency pressures in developing economies, including Indonesia.
At home, the domestic economic recovery remains intact. Gross domestic product (GDP) in the second quarter of 2022 was realised at 5.44% (yoy), significantly above the previous projection and 5.01% (yoy) recorded in the first quarter of 2022. Strong national economic growth is driven by increasing domestic demand, particularly household consumption, amid persistently solid export performance. National economic improvements are also reflected in stronger growth of most economic sectors, led by Manufacturing, Transportation and Storage as well as Wholesale and Retail Trade. Spatially, economic gains were recorded in all regions, particularly Java, Sumatra and Sulawesi-Maluku-Papua (Sulampua). Moving forward, solid economic growth is expected to persist. Several early indicators in July 2022 and the latest surveys conducted by Bank Indonesia continue to point to further improvements in terms of consumer confidence, retail sales and the Manufacturing Purchasing Managers Index (PMI). Externally, export performance as of July 2022 remained in positive territory despite the global economic slowdown. Consequently, economic growth in 2022 is projected with a bias towards the upper bound of Bank Indonesia's 4.5-5.3% projection.
Indonesia's Balance of Payments (BOP) remains solid, thus maintaining external resilience. A positive BOP was recorded in the second quarter of 2022, underpinned by a wider current account surplus and narrower capital and financial account deficit. The latest developments indicate a gradual recovery of portfolio investment to domestic financial markets, recording a net inflow of USD1.6 billion as of 19th August 2022 to reverse the net outflow of USD2.1 billion in July 2022. Meanwhile, the position of reserve assets in Indonesia at the end of July 2022 stood at USD132.2 billion, equivalent to 6.2 months of imports or 6.1 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 in the range from surplus 0.3% - deficit 0.5% of GDP due to persistently high international commodity prices, supported solid FDI performance given the conducive domestic investment climate.
Thanks to the policies instituted by Bank Indonesia, rupiah stability has been maintained despite persistently elevated global financial market uncertainty. As of 22nd August 2022, the rupiah appreciated by an average of 0.94%, yet depreciated 0.37% (ptp) on the level recorded at the end of July 2022. Rupiah performance is consistent with the return of foreign capital inflows to domestic financial markets, maintained domestic foreign exchange supply and the positive perception of Indonesia's economic outlook, despite high global financial market uncertainty. As of 22nd August 2022, therefore, the rupiah depreciated 4.27% (ytd) on the level recorded at the end of 2021, which is nevertheless comparatively lower than the currency depreciation experienced in other peer economies, such as India (6.92%), Malaysia (7.13%) and Thailand (7.38%). Moving forward, Bank Indonesia will continue to strengthen rupiah stabilisation policy in line with the fundamental value, thereby reinforcing macroeconomic stability and efforts to manage inflation.
Soaring international food and energy prices are intensifying inflationary pressures. The Consumer Price Index (CPI) in July 2022 recorded 4.94% (yoy) inflation, up from 4.35% (yoy) the month earlier. Inflationary pressures on volatile food (VF) soared to 11.47% (yoy), impacted by rising international food prices and supply disruptions. Administered prices (AP) inflation also increased to 6.51% (yoy) in line with higher airfares and non-subsidised fuel prices. On the other hand, however, core inflation remains comparatively low at 2.86% (yoy) in line with policy consistency by Bank Indonesia to anchor inflation expectations. Moving forward, pressures on headline inflation are expected to increase on soaring global energy and food prices, coupled with supply gaps. Furthermore, core inflation and inflation expectations could potentially increase due to higher non-subsidised fuel prices and VF inflation, together with intense inflationary pressures on the demand side. Such developments are expected to push inflation in 2022 and 2023 beyond the 3.0%±1% target corridor, thus necessitating close policy synergy between the Government and Bank Indonesia to manage inflation.
Ample liquidity in the banking industry and economy remains. Bank Indonesia continues to normalise liquidity policy by raising rupiah reserve requirements (RR) gradually and maintaining the RR incentive without disrupting liquidity conditions or the intermediation function in the banking industry. In July 2022, the ratio of liquid assets to third-party funds remained high at 27.92%, thus supporting the banking industry's ability to disburse loans. Liquidity conditions in the economy are loose, as reflected by 14.89% (yoy) and 9.58% (yoy) growth of narrow money (M1) and broad money (M2) respectively. Meanwhile, implementing the Joint Decree of the Finance Minister and Bank Indonesia Governor, Bank Indonesia 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 Rp58.32 trillion as of 22nd August 2022.
The bank intermediation function continues to improve and support the economic recovery. Growth of outstanding loans disbursed by the banking industry in July 2022 stood at 10.71% (yoy), driven by all loan types and most economic sectors. Intermediation in the sharia banking industry also continues to recover, with growth hitting 15.2% (yoy) in July 2022. On the supply side, a stronger intermediation function was supported by looser lending standards in the banking industry particularly targeting the Manufacturing Industry, Agriculture and Trade as the banks' appetite to disburse new loans improves.
The banking industry continues to lower interest rates, though by smaller increments. In the markets, the 1-month deposit rate has fallen 54bps since July 2021 to reach 2.89% in July 2022. In the credit market, the banking industry lowered lending rates by 53bps in the same period to 8.94%. On the demand side, a corporate sector recovery is driving intermediation, as reflected by strong sales growth and capital expenditures (CapEx), particularly in the Agricultural sector, Mining, Manufacturing and Trade. Household investment and consumption are improving in line with greater mobility and consumer optimism, thus increasing demand for bank loans. In terms of micro, small and medium enterprises, MSME loan growth stood at 18.08% (yoy) in July 2022, primarily supported by the micro and small segments.
Financial system resilience remains solid in terms of capital and liquidity. The Capital Adequacy Ratio (CAR) in the banking industry remained high in June 2022 at 24.66%. Strong capital is helping to minimise credit risk, as reflected by low NPL ratios of 2.86% (gross) and 0.80% (nett). Liquidity in the banking industry was maintained in July 2022, supported by deposit growth of 8.59% (yoy). BI simulations confirmed that bank resilience has been maintained, yet several risk factors stemming from domestic macro conditions and external shocks demand vigilance due to their potential impact on the pace of intermediation recovery moving forward. Furthermore, Bank Indonesia continues to strengthen policy synergy with the Financial System Stability Committee to maintain macroeconomic and financial system stability, while simultaneously strengthening synergy with the Government, other authorities and the corporate sector to revive lending to priority sectors and support the ongoing economic recovery.
Bank Indonesia is strengthening payment system policy synergy to accelerate the 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 39.76% (yoy) in July 2022 to reach Rp35.5 trillion and the value of digital banking transactions climbed 27.82% (yoy) to reach Rp4,359.7 trillion in the same period as community mobility returns to normal. Meanwhile, payment transactions using ATM cards, debit cards and credit cards increased 34.87% (yoy) to Rp739.4 trillion in the reporting period. Bank Indonesia continues to strengthen implementation preparations for the Domestic Government Credit Card and National Open API Payment Standard (SNAP) in order to realise integrated, interconnected and interoperable payment system services. Bank Indonesia is strengthening coordination and collaboration with the National Working Group to Accelerate and Expand Local Digitalisation (P2DD) to accelerate regional digitalisation and support local economic growth. In terms of cash, currency in circulation expanded 7.08% (yoy) in July 2022 to Rp913.3 trillion. Meanwhile, Bank Indonesia continues to ensure the availability of quality rupiah currency fit for circulation throughout the territory of the Republic of Indonesia, while strengthening educational efforts concerning Rupiah Love, Pride and Understanding, including the new 2022 series of rupiah banknotes.
Bank Indonesia is accelerating BI-FAST transactions by increasing the number of participants and implementing the system in central banking services. On 29th August 2022, Bank Indonesia will onboard the fourth wave of 25 new BI-FAST bank participants, consisting of 2 direct participants and 23 indirect participants (Appendix 3), thus bringing the total to 77 participants, representing 85% of the national retail payment system. In addition, Bank Indonesia is also expanding central banking services via BI-FAST to support task implementation in terms of monetary, macroprudential, the payment system and rupiah currency management. Moving forward, Bank Indonesia will continue to implement and develop BI-FAST services, including cross-border retail payments, for strengthening policy synergy with industry players to accelerate economic recovery and foster growth as well as economic and financial inclusion.
Jakarta, 23rd August 2022Head of Communication DepartmentErwin HaryonoExecutive DirectorInformation about Bank IndonesiaTel. 021-131, Email:
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