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The BI Board of Governors agreed on 19th and 20th October 2022 to raise the BI 7-Day Reverse Repo Rate (BI7DRR) by 50bps to 4.75%, while also raising the Deposit Facility (DF) and Lending Facility (LF) rates by 50bps to 4.00% and 5.50% respectively. The decision to raise the policy rate was taken as a front-loaded, pre-emptive and forward-looking measure to lower overshooting inflation expectations and return core inflation to the 3.0%±1% target corridor in the first half of 2023, while simultaneously strengthening exchange rate stabilisation policy in line with the rupiah's fundamental value in response to broad-based US dollar appreciation and 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 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.
Global economic is prone to moderation, accompanied by intense inflationary pressures and global financial market uncertainty. After improving in 2022, global economic growth in 2023 is expected to decelerate further than previously expected, with the risk of recession in several countries. Economic growth has been revised down in several advanced economies, particularly the United States (US) and Europe, and also in China. Global economic moderation stems from ongoing geopolitical tensions that have triggered economic, trade and investment fragmentation, and prompted more aggressive tightening of monetary policy. The contagion effect of global economic fragmentation is also expected to undermine emerging market economies (EME). Meanwhile, intense inflationary pressures and high core inflation globally due to supply chain disruptions have spurred more aggressive monetary policy tightening. A higher for longer federal funds rate (FFR) is strengthening the US dollar, thus inducing depreciatory pressures in various economies, including Indonesia. Currency pressures are escalating with increasing global financial market uncertainty, thus exacerbating investment portfolio outflows from EMEs, including Indonesia.
At home, the national economic recovery remains intact. Third-quarter gains are projected for the domestic economy on the back of increasing non-building investment and private consumption, persistently solid exports and maintained public purchasing power despite higher inflation. Several early indicators in September 2022 and the latest surveys conducted by Bank Indonesia, namely 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 persist, specifically in terms of coal, crude palm oil (CPO) as well as iron and steel, in line with strong demand in key trading partners and government policy to stimulate exports of CPO and its derivatives. 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 trade, 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. Meanwhile, strong economic growth is still projected for 2023 on the back of solid domestic demand given increasing mobility and the completion of various national strategic projects despite deeper global economic moderation.
Indonesia's Balance of Payments (BOP) remains sound in line with persistently strong non-oil and gas export performance. Similar to conditions in the previous period, the current account is projected to maintain a surplus in line with the USD14.9 billion trade surplus. Meanwhile, pressures on foreign capital flows are increasing, primarily in the form of portfolio investment, due to elevated global financial market uncertainty. Portfolio investment is expected to record a net outflow of USD2.1 billion in the third quarter. The position of reserve assets in Indonesia at the end of September 2022 stood at USD130.8 billion, equivalent to 5.9 months of imports or 5.7 months of imports and servicing government external debt, which is well above the 3-month international adequacy standard. Despite global financial market uncertainty, which is expected to remain high, BOP performance in 2022 will be maintained with a positive current account in the 0.4-1.2% of GDP range, coupled with a sound capital and financial account that is dominated by foreign direct investment (FDI). Strong BOP performance is projected in 2023, supported by a solid current account along with capital and financial account, notwithstanding the persistent risk of uncertainty blighting global financial markets.
Rupiah stability has been maintained despite increasing global financial market uncertainty and US dollar appreciation. The US Dollar (DXY) Index peaked at 114.76 on 28th September 2022 and stood at 112.98 on 19th October 2022, increasing 18.10% (ytd) in 2022. As of 19th October 2022, the rupiah depreciated 8.03% (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 (10.42%), Malaysia (11.75%) and Thailand (12.55%). Depreciation is in line with the strong US dollar and increasing global financial market uncertainty caused by aggressive monetary policy tightening in several jurisdictions, particularly the US, in response to inflationary pressures and concerns stoked by global economic moderation, despite the positive perception of Indonesia's economic outlook. Moving forward, Bank Indonesia will continue to monitor the supply of foreign exchange and 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 is lower than initially projected. The Consumer Price Index (CPI) in September 2022 stood at 5.95% (yoy), up from 4.69% (yoy) the month earlier, after fuel prices were adjusted. Inflation in September 2022 was lower than previously projected because the impact of fuel price hikes on volatile food and administered prices was weaker than initially forecast. Volatile food (VF) inflation of 9.02% (yoy) is in line with close policy coordination and synergy through the TPIP-TPID inflation control teams and National Movement for Food Inflation Control (GNPIP), which aim to safeguard supply availability, orderly distribution, price stability and effective communication. The increase in administered prices (AP) inflation was also lower than previously expected, namely 13.28% (yoy), in line with lower adjustments to fuel prices and transportation tariffs. Meanwhile, low core inflation was maintained at 3.21% (yoy) given the weaker second-round effect of fuel price adjustments, coupled with mild inflationary pressures from the demand side. Notwithstanding overshooting inflation expectations in the Consensus Forecast, the Cost of Living Survey in the second week of October projected lower inflation in October than in September 2022. Based on such developments, Bank Indonesia expects lower inflation in 2022 than previously projected, despite still exceeding the upper limit of the 3.0%±1% target. Policy synergy between the central/regional government and Bank Indonesia will be strengthened to restore inflation to the target corridor.
Ample liquidity in the banking industry and economy remains. In September 2022, the ratio of liquid assets to third-party funds remained high at 27.35%, thereby supporting the banking industry's ability to disburse loans amid ongoing liquidity policy normalisation by Bank Indonesia through gradual increments in rupiah reserve requirements (RR) and maintaining the RR incentive. Liquidity conditions in the economy are loose, as reflected by 13.5% (yoy) and 9.1% (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 Rp138.08 trillion as of 19th October 2022. Ample liquidity is also helping to drive the economic recovery.
Policy rate hikes are raising money market rates amid interest rate rigidity in the banking industry. In the markets, the IndONIA rate increased 102bps from the end of July 2022 to 3.82% on 19th October 2022 in line with the higher BI7DRR and strengthening the monetary operations strategy of Bank Indonesia. Short-term SBN yields are up 114bps, coupled with relatively stable long-term SBN yields. Lending rates and funding costs in the banking industry are experiencing rigidity in line with loose liquidity conditions that are prolonging the lag effect of policy rate transmission.
The bank intermediation function continues to improve and support the economic recovery. Growth of outstanding loans disbursed by the banking industry in September 2022 stood at 11.00% (yoy), boosted by all loan types and economic sectors. Intermediation in the sharia banking industry also continues to recover, with growth accelerating to 19.0% (yoy) in September 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, agricultural sector, trade and construction. 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 17.13% (yoy) in September 2022, primarily supported by the micro segment. Bank Indonesia appreciates the contribution of the banking industry in terms of accelerating the national economic recovery by increasing lending to the corporate sector and maintaining accommodative lending rates. Based on the latest developments and synergetic efforts by the authorities, financial sector and corporate sector, credit growth in 2022 is projected in the 9-11% (yoy) range.
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 August 2022 at 25.12%. Strong capital is helping to minimise credit risk, as reflected by low NPL ratios of 2.88% (gross) and 0.79% (nett). Liquidity in the banking industry was maintained in September 2022, supported by deposit growth of 6.77% (yoy) despite moderating from 7.77% in August 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 the potential impact of several risk factors stemming from domestic macroeconomic conditions and global economic turmoil demand vigilance.
Bank Indonesia is strengthening payment system policy and accelerating digitalisation to improve the efficiency of economic transactions and support economic recovery. 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 35.79% (yoy) in the third quarter of 2022, which is projected to increase by 32.27% (yoy) in 2022 to reach Rp404 trillion. In addition, the value of digital banking transactions increased 29.47% (yoy) in the third quarter of 2022, which is projected to increase by 30.19% (yoy) in 2022 to reach Rp53,144 trillion. Bank Indonesia continues to foster payment system innovation, including ongoing preparations for the post-pilot implementation of QRIS TTS (withdrawal, transfer, deposit), while expanding cross-border QRIS arrangements. In terms of cash, currency in circulation in the third quarter of 2022 increased 7.61% (yoy). 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, 20th October 2022
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