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The BI Board of Governors agreed on 21st and 22nd September 2022 to raise the BI 7-Day Reverse Repo Rate (BI7DRR) by 50bps to 4.25%, while also raising the Deposit Facility (DF) and Lending Facility (LF) rates by 50bps to 3.50% and 5.00% respectively. The decision to raise the policy rate was taken as a front-loaded, pre-emptive and forward-looking measure to lower inflation expectations and return core inflation to the 3.0%±1% target corridor in the latter half of 2023, while simultaneously strengthening exchange rate stabilisation policy in line with the rupiah's fundamental value, caused by elevated global financial market uncertainty amid strong and increasing domestic 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 effective implementation of the 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 continues to strengthen international cooperation with other central banks and authorities in partner countries, while promoting investment and trade in priority sectors in synergy with other relevant institutions. Coordination with the Ministry of Finance and other relevant government ministries/agencies is also being strengthened to ensure the success of the six priority agendas in the Finance Track of Indonesia's G20 Presidency in 2022, including the 4th FMCBG meeting in October 2022 and the G20 Leaders' Summit in November 2022.
The global economy is prone to moderation, accompanied by intense inflationary pressures and global financial market uncertainty. Economic growth is expected to decelerate further in 2023, particularly in the United States, Europe and China, with the threat of recession looming in several advanced economies. World trade volume is also low. Amid the economic moderation, supply disruptions are increasing, thus creating persistently high energy prices. Global inflationary pressures are escalating in response to geopolitical tensions, inward-looking policies and the recent heatwave experienced in several countries. Inflation in advanced economies and emerging markets is soaring, with the rising trend of core inflation prompting more aggressive monetary policy in many jurisdictions. The US Federal Reserve has hiked the federal funds rate, with potentially more aggressive increases ahead. The move has strengthened the US dollar and heightened global financial market uncertainty, thus restraining portfolio investment flows and intensifying currency pressures in emerging markets, including Indonesia.
At home, the national economic recovery remains intact given improving domestic demand and positive export performance. Private consumption has grown significantly on rising incomes, available financing and stronger consumer confidence in line with increasing mobility. Household consumption is supported by government policy to increase social assistance and maintain public purchasing power, particularly among low earners, amid rising inflation after the Government reallocated fuel subsidies. Domestic demand has also increased in terms of investment, non-building investment in particular. Ongoing domestic economic improvements were also reflected in several early indicators released in August 2022 and the latest surveys conducted by Bank Indonesia, including improving consumer confidence, retail sales and the manufacturing Purchasing Managers Index (PMI). Externally, solid export performance is expected to persist, specifically in terms of crude palm oil (CPO), coal, iron and steel in line with strong demand in key trading partners and government policy to stimulate CPO exports, while relaxing entry restrictions for international travellers. Spatially, positive export performance was supported by all regions, especially Kalimantan and Sumatra. Furthermore, national economic improvements were also reflected in the main economic sectors, namely the manufacturing industry, mining and agriculture. 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) is expected to improve in line with solid export performance. A strong current account in the third quarter of 2022 is projected, underpinned by improving export performance on strong demand in several key trading partners, along with government policy support to stimulate exports and persistently high international commodity prices. Meanwhile, pressures on foreign capital flows remain, primarily in the form of portfolio investment, amid increasing global financial market uncertainty. In the third quarter of 2022 (as of 20th September 2022), portfolio investment recorded a net outflow totalling USD0.6 billion. The position of reserve assets in Indonesia at the end of August 2022 stood at USD132.2 billion, equivalent to 6.1 months of imports or 6.0 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 expected to surpass the previous projection, primarily supported by persistently high international commodity prices and supported by a capital and financial account surplus, dominated by foreign direct investment (FDI), in line with the conducive investment climate in Indonesia.
Rupiah stability has been maintained despite increasing global financial market uncertainty. As of 21st September 2022, the rupiah depreciated 1.03% (ptp) on the level recorded at the end of August 2022. Rupiah performance has been maintained with the support of domestic foreign exchange supply, positive perception concerning Indonesia's economic outlook as well as BI stabilisation measures. As of 21st September 2022, therefore, the rupiah depreciated 4.97% (ytd) on the level recorded at the end of 2021, which is nevertheless comparatively lower than the currency depreciation experienced in other peer countries, such as India (7.05%), Malaysia (8.51%) and Thailand (10.07%). Moving forward, Bank Indonesia will continue to strengthen rupiah stabilisation policy in line with the currency's fundamental value, thereby reinforcing macroeconomic stability and efforts to manage inflation.
Soaring global food and energy prices, coupled with higher fuel prices at home, are intensifying inflationary pressures. The Consumer Price Index (CPI) in August 2022 recorded 4.69% (yoy) inflation in line with higher administered prices (AP) inflation at 6.84% (yoy) and core inflation at 3.04% (yoy). In contrast, volatile food (VF) inflation slowed to 8.93% (yoy) as regional supply from production hubs increased. Pressures on CPI inflation are expected to intensify after the Government raised subsidised fuel prices amid persistently high international energy and food prices. Core inflation and inflation expectations are forecast to increase due to the second-round effect of higher fuel prices and a build-up of inflationary pressures on the demand side. Such developments are predicted to push inflation in 2022 beyond the upper limit of the 3.0%±1% target, thus necessitating stronger policy synergy between the central/regional government and Bank Indonesia on the supply and demand sides to return inflation to the target corridor in the second semester of 2023.
Ample liquidity in the banking industry and economy remains. Gradually, Bank Indonesia continues to normalise liquidity policy by raising rupiah reserve requirements (RR) and maintaining the RR incentive, which absorbed Rp269.3 trillion of liquidity in the banking industry from 1st March to 15th September 2022 without disrupting the intermediation function or participation in SBN purchases to fund the State Revenue and Expenditure Budget (APBN). In August 2022, the ratio of liquid assets to third-party funds remained high at 26.52%. Furthermore, liquidity conditions in the economy are loose, as reflected by 13.7% (yoy) and 9.5% (yoy) growth of narrow money (M1) and broad money (M2) aggregates respectively. Meanwhile, implementing the Joint Decree of the Finance Minister and Bank Indonesia Governor, 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 Rp102.3 trillion as of 20th September 2022. In addition, the implementation of operation twist has successfully raised the yields of short SBN tenors, while maintaining longer term yields. On 20th September 2022, the IndONIA rate had increased 58bps compared with the level recorded at the end of July 2022, thus reaching 3.38%.
The bank intermediation function continues to improve and support the economic recovery. Growth of outstanding loans disbursed by the banking industry in August 2022 stood at 10.62% (yoy), boosted by all loan types and most economic sectors. Intermediation in the sharia banking industry also continues to recover, with growth accelerating to 18.7% (yoy) in August 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 agricultural sector, manufacturing industry, construction and trade. The banking industry continues to lower interest rates. In the markets, the 1-month deposit rate has fallen 44bps since August 2021 to reach 2.90% in August 2022. In the credit market, the banking industry lowered lending rates by 48bps in the same period to 8.94%. On the demand side, an ongoing corporate and household sector recovery is driving intermediation. In the corporate sector, improving performance is reflected in the high growth of sales and capital expenditures (CapEx), particularly in the agricultural sector, mining, manufacturing and trade, coupled with increasing tax revenues from the corporate sector. 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 stood at 16.77% (yoy) in August 2022, primarily supported by the micro segment.
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 July 2022 at 24.86%. Strong capital is helping to minimise credit risk, as reflected by low NPL ratios of 2.90% (gross) and 0.82% (nett). Liquidity in the banking industry was maintained in August 2022, supported by deposit growth of 7.77% (yoy) despite moderating from 8.59% in July 2022 due to increasing private consumption and corporate capital expenditures as well as the current preference to place funds in other financial assets, as indicated by the value of SBN holdings. BI simulations confirmed that bank resilience has been maintained, yet several risk factors stemming from domestic macroeconomic conditions and external shocks demand vigilance due to their potential impact on the pace of intermediation recovery moving forward.
Bank Indonesia is strengthening payment system policy and accelerating digitalisation to support economic recovery. Despite the challenges posed by inflationary pressures, 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 43.24% (yoy) in August 2022 to reach Rp35.5 trillion and the value of digital banking transactions increased 31.40% (yoy) to Rp4,557.5 trillion as community mobility returns to normal. Meanwhile, payment transactions using ATM cards, debit cards and credit cards climbed 34.72% (yoy) to Rp722.5 trillion in the reporting period. Bank Indonesia continues to foster payment system innovation, including ongoing preparations for the gradual implementation of a domestic government credit card (KKP), which will increase KKP acceptance and transactions, while improving government transaction efficiency. In terms of cash, currency in circulation in August 2022 increased 6.96% (yoy) to reach Rp902.7 trillion. Bank Indonesia continues to ensure the availability of quality rupiah currency fit for circulation throughout the territory of the Republic of Indonesia, including the new 2022 series of rupiah banknotes.
Jakarta, 22nd September 2022
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