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The BI Board of Governors Meeting agreed on 18-19th October 2023 to raise the BI 7-Day Reverse Repo Rate (BI7DRR) by 25bps to 6.00%, while also raising the Deposit Facility (DF) rate and Lending Facility (LF) rate by 25bps to 5.25% and 6.75% respectively. The decision bolsters rupiah stabilisation policy against heightening global uncertainty, and as a pre-emptive and forward-looking measure to mitigate the impact of imported inflation, thus bringing inflation under control and within the 3.0%±1% target corridor in 2023 and 2.5%±1% in 2024. Meanwhile, the accommodative macroprudential policy stance has been strengthened by the effective implementation of Macroprudential Liquidity Policy Incentives (KLM) and by lowering the Macroprudential Liquidity Buffer (MPLB) to revive lending/financing for national economic growth. Payment system digitalisation has also been accelerated to expand digital economic and financial inclusion, including the electronification of central and regional government transactions.
Bank Indonesia has, therefore, strengthened its mix of monetary, macroprudential and payment system policies to maintain stability and revive sustainable growth as follows:
Policy coordination between Bank Indonesia and the Government is also constantly improved to maintain macroeconomic stability and safeguard economic growth from the spillover effect of high global uncertainty. Coordinated inflation control with the Central and Regional Inflation Control Teams (TPIP and TPID) is also strengthened through the National Movement for Food Inflation Control (GNPIP) in various regions, along with coordination to accelerate payment system digitalisation through P2DD Teams to Accelerate and Expand the Electronification of Central and Regional Government Transactions. Furthermore, policy synergy between Bank Indonesia and the Financial System Stability Committee is also strengthened to maintain macroeconomic and financial sector stability, while nurturing lending/financing to businesses, particularly in priority sectors. Bank Indonesia is also expanding cooperation with other central banks in partner countries, while facilitating investment and trade promotion in priority sectors in synergy with the relevant institutions. In addition, Bank Indonesia is coordinating with government ministries/agencies to disseminate the various deliverables under Indonesia's ASEAN Chairmanship in 2023.
Global economic moderation is accompanied by rising uncertainty. Global economic growth is expected to decelerate, accompanied by broader growth divergence between jurisdictions. Economic growth in 2023 is projected at 2.9%, before slowing to 2.8% in 2024, with risk tracking a downward trend. The US economy continues to post solid growth in 2023, primarily on the back of household consumption and domestic-oriented services, while moderation in China is stoked by weaker consumption and property sector performance. Increasing geopolitical tensions are pushing up food and energy prices, thus perpetuating high inflation globally. In response, policy rates in advanced economies, including the Federal Funds Rate (FFR), are expected to remain higher for longer. Higher global interest rates will be accompanied by increases in long-term government bond yields in advanced economies, particularly the US Treasury, due to the growing need for government debt financing, coupled with an increase in long-term risk premia (term premia). Such developments have prompted a rebalancing of capital flows from emerging market economies (EMEs) to advanced economies and more liquid assets, leading to broad-based US dollar appreciation against several global currencies. Global economic and financial market uncertainty is increasing as it coincides with escalating geopolitical tensions, thus requiring an optimal policy response to mitigate the adverse impact of global spillovers on domestic economic resilience in EMEs, including Indonesia.
At home, economic growth in Indonesia remains solid and resilient to global spillovers. In the third quarter of 2023, economic growth was underpinned by private consumption, including consumption by younger generations, which increased in line with higher consumption in the services sector and persistently upbeat consumer confidence. Investment continues to perform well in line with the ongoing completion of national strategic projects (PSN). Meanwhile, growth of real exports has slowed in line with weaker demand from Indonesia's main trading partners, particularly China, together with lower international commodity prices, while growth of services exports remains high in response to a surge of international travellers. Regionally, economic growth is strongest in the Sulampua, Kalimantan and Java regions. Consequently, Bank Indonesia projects economic growth in 2023 in the 4.5-5.3% range, before accelerating in 2024. Further economic improvements in 2024 will primarily stem from domestic demand in line with higher salaries for civil servants, the upcoming general election and development of the new capital city. Supporting economic growth, specifically on the demand side, Bank Indonesia continues increasing macroprudential policy stimuli and accelerating payment system digitalisation in close synergy with the Government's fiscal policy.
Indonesia's Balance of Payments (BOP) remains manageable, thereby maintaining external stability. In the third quarter of 2023, the trade balance amassed a USD7.8 billion surplus, thus supporting a healthy current account. Meanwhile, increasing global financial market uncertainty triggered a net outflow of foreign capital in the form of portfolio investment in the third quarter of 2023 totalling USD2.1 billion. Foreign capital outflow pressures persist in the fourth quarter of 2023, with a net outflow of USD0.4 billion recorded as of 17th October 2023. The position of reserve assets at the end of September 2023 stood at USD134.9 billion, equivalent to 6.1 months of imports or 6.0 months of imports and servicing government external debt, which is well above the international adequacy standard of around 3 months of imports. Looking ahead, BOP performance in 2023 is forecast to remain sound, supported by a manageable current account maintained in the range of a 0.4% surplus to a 0.4% deficit of GDP. In 2024, BOP performance as expected to remain solid despite heightened global economic and financial market uncertainty.
The strong US dollar triggered broad-based depreciatory pressures on other currencies, including the rupiah. Compared with conditions at the end of 2022, the DXY Index gained 2.60% (ytd) to reach a level of 106.21 recorded on 18th October 2023. The strong US dollar triggered broad-based depreciatory pressures on nearly all global currencies, with the Japanese yen, Australian dollar and euro losing 12.44%, 6.61% and 1.40% (ytd) in value, accompanied by 7.23%, 4.64% and 1.73% (ytd) depreciation of the Malaysian ringgit, Thai baht and Philippine peso respectively. In the same period, the rupiah outperformed several regional and global currencies, losing just 1.03% (ytd) in value as a corollary of the stabilisation measures taken by Bank Indonesia. Moving forward, in response to persistent global financial market uncertainty, Bank Indonesia will continue strengthening rupiah stabilisation policy in line with the currency's fundamental value to control imported inflation. In addition to foreign exchange market intervention, Bank Indonesia is accelerating rupiah money market and foreign exchange market deepening efforts, which include optimising SRBI and issuing other instruments to increase market mechanisms for liquidity management at domestic financial institutions as well as attract foreign portfolio inflows from abroad. Coordination with the Government, banking industry and business community will be increased and expanded to effectively implement instruments that retain the proceeds of natural resources exports in accordance with Government Regulation Number 36 of 2023 (PP DHE SDA).
Inflation remains under control within the target corridor. Consumer Price Index (CPI) inflation was recorded in September 2023 at 2.28% (yoy), down from 3.27% (yoy) the month earlier. Lower headline inflation was supported by core inflation, which fell to 2.00% (yoy), and AP inflation that retreated to 1.99% (yoy). In contrast, volatile food (VF) inflation accelerated to 3.62% (yoy) from 2.42% (yoy) one month earlier, edged up by rising rice and beef prices. Low and stable inflation is the tangible outcome of monetary policy consistency and close inflation control synergy between Bank Indonesia and the (central and regional) Government within the TPIP and TPID teams through the GNPIP movement in various regions. Moving forward, Bank Indonesia will continue monitoring several risks that could induced inflationary pressures, including the impact of higher international food and energy prices, coupled with rupiah depreciation pressures on imported inflation. To that end, Bank Indonesia continues strengthening its monetary policy mix and synergy with the (central and regional) Government to ensure inflation remains under control in the 3.0%±1% target this year and 2.5%±1% in 2024.
Bank Indonesia continues innovating to enhance monetary policy effectiveness, which includes safeguarding manageable inflation and rupiah stability. To that end, the policy rate was strengthened by issuing pro-market monetary instruments in the form of Bank Indonesia Rupiah Securities (SRBI) to bolster money market deepening efforts, attract portfolio inflows and optimise the SBN held by Bank Indonesia as underlying assets. The markets have embraced SRBI issuances enthusiastically, with auctions remaining oversubscribed. As of 17th October 2023, a total of nine SRBI auctions have been held, with outstanding bids totalling Rp113.70 trillion. This was also accompanied by an uptick in transactions on the secondary market. In addition, issuances of Bank Indonesia Rupiah Securities (SRBI) also support foreign capital inflows in the form of portfolio investment, as reflected by a net buy of SRBI by non-resident investors totalling Rp9.81 trillion. In general, such developments demonstrate that SRBI instruments can effectively replace Reverse Repo (RR) SBN as a contractionary monetary instrument and simultaneously attract foreign capital inflows to strengthen the external resilience of Indonesia's economy from the impact of global spillovers.
Liquidity remains ample in the banking system and economy. Base money (M0) growth stood at 5.4% (yoy), driven by expansionary fiscal policy against moderation in terms of Net Foreign Assets (NFA). In September 2023, government financial operations recorded a Rp56.83 trillion expansion in line with seasonal trends to reverse the Rp268.29 trillion contraction recorded as of August 2023. Meanwhile, the monetary aggregates of narrow money (M1) and broad money (M2) in September 2023 grew 4.1% (yoy) and 6.0% (yoy) respectively. M2 developments were primarily influenced by solid credit growth and expansionary financial operations by the Government. In line with base money, government financial operations in September 2023 recorded a Rp35.56 trillion expansion after recording a Rp305.03 trillion contraction as of August 2023. Bank Indonesia continues to ensure adequate liquidity through the effectiveness of existing policies and accommodative follow-up macroprudential policies to maintain credit growth and accelerate the national economic recovery.
Loose liquidity supports the bank intermediation function and maintains financial system stability. In September 2023, the ratio of liquid assets to third-party funds (LA/TPF) remained high at 25.83%. Ample liquidity maintained favourable interest rates in the banking industry, with the 1-month term deposit rate and lending rate in September 2023 recorded at 4.28% and 9.36% respectively. Adequate bank liquidity is also supported by the implementation of Macroprudential Liquidity Policy Incentives (KLM), effective from 1st October 2023, with a maximum incentive of 4%. During initial implementation (5th October 2023), Macroprudential Liquidity Policy Incentives provided additional liquidity to 120 banks totalling Rp28.79 trillion, thus increasing from Rp108.15 trillion to Rp136.94 trillion. The additional liquidity is expected to only increase moving forward in line with stronger credit growth to priority sectors as the primary policy focus. Bank Indonesia will continue ensuring adequate liquidity to maintain financial system stability and increase lending to support sustainable economic growth.
The bank intermediation function continues to improve. Loans disbursed by the banking industry in September 2023 grew 8.96% (yoy), supported by greater bank appetite and early signs of increasing demand for financing in line with sound corporate performance. By sector, credit growth was primarily driven in the reporting period by Corporate Services, Trade and Social Services. Furthermore, Islamic finance accelerated to 14.69% (yoy). In the MSME segment, growth reached 8.34% (yoy), predominantly boosted by People's Business Loans (KUR). Moving forward, Bank Indonesia will continue reviving bank lending/financing and strengthening synergy with the Government to maintain economic growth momentum, particularly in priority and inclusive sectors as well as the green economy. Consequently, Bank Indonesia forecasts credit growth in 2023 in the 9-11% range before accelerating further in 2024.
Banking industry resilience remains solid, supported by a strong capital base and low credit risk. The Capital Adequacy Ratio (CAR) in the banking industry is still high at 27.62%, with credit risk mitigated effectively, as reflected by low NPL ratios of 2.50% (gross) and 0.79% (nett) in July 2023. Liquidity in the banking industry in September 2023 was maintained, supported by 6.54% (yoy) growth of third-party funds (TPF). The results of BI stress tests further confirmed solid banking industry resilience in the face of global pressures. Bank Indonesia will continue strengthening synergy with the Financial System Stability Committee (KSSK) to mitigate various domestic and global economic risks that could undermine financial system resilience and economic recovery momentum.
Digital economic and financial transactions continue to perform solidly, supported by a secure, uninterrupted and reliable payment system. The value of electronic money transactions in the third quarter of 2023 increased 10.34% (yoy) to reach Rp116.54 trillion, while the value of digital banking transactions grew 12.83% (yoy) to Rp15,148.71 trillion. The value of QRIS transactions continues enjoying strong 87.90% (yoy) growth, amounting to Rp56.92 trillion, with users and merchants totalling 41.84 million and 29.04 million respectively, dominated by MSMEs. Bank Indonesia continues accelerating payment system digitalisation and expanding cross-border payment linkages towards greater economic and financial inclusion as well as expansion of the digital economy and finance. Meanwhile, the value of card-based payments using ATM, debit and credit cards reached Rp2,041.72 trillion in the reporting period, down 4.94% (yoy). In terms of rupiah currency management, total currency in circulation in the third quarter of 2023 grew 6.16% (yoy) to Rp961.59 trillion. In addition, Bank Indonesia continues ensuring the availability of rupiah currency fit for circulation in all regions of the Republic of Indonesia through programs to circulate the rupiah in 3T (outermost, frontier, remote) regions as well as mobile cash services, cash deposit services and the Sovereign Rupiah Expedition.
Jakarta, 19th October 2023
BI Graphic Governor's Meeting - October 2023
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