BI 7-Day Reverse Repo Rate Held At 5.75%: Synergy Maintaining Stability And Reviving Growth

No. 25/65/DKom

The BI Board of Governors Meeting agreed on 15th and 16th March 2023 to hold the BI 7-Day Reverse Repo Rate at 5.75%, while also maintaining the Deposit Facility (DF) rate at 5.00% and Lending Facility (LF) rate at 6.50%.The decision is consistent with the pre-emptive and forward-looking monetary policy stance to ensure lower inflation expectations and inflation moving forward. Bank Indonesia is confident that a BI7DRR rate of 5.75% is sufficient to direct core inflation within the 3.0%±1% target corridor in the first semester of 2023 and return Consumer Price Index (CPI) inflation to the 3.0%±1% target in the second semester of 2023. Rupiah stabilisation policy has also been strengthened to control imported inflation and mitigate the contagion effect of global financial market uncertainty on the Rupiah.

Bank Indonesia, therefore, has strengthened its policy mix response to maintain stability and revive growth as follows:

1. Strengthening monetary operations to increase the effectiveness of monetary policy transmission.
2. Strengthening Rupiah stabilisation policy as part of the measures to control inflation, particularly imported inflation, through foreign exchange market intervention, including spot and Domestic Non-Deliverable Forward (DNDF) transactions, as well as buying/selling government securities (SBN) in the secondary market.
3. Continuing the twist operation by selling short-term SBN in the secondary market to increase the attractiveness of SBN yields for foreign portfolio investment inflows to strengthen Rupiah stabilisation measures.
4. Strengthening the management of foreign exchange proceeds of exports (DHE) through the foreign exchange monetary operation instrument in the form of foreign currency term deposits (TD) as an instrument for exporters to place foreign exchange proceeds of exports through banks to Bank Indonesia in accordance with market mechanisms, effective from 1stMarch 2023.
5. Continuing prime lending rate (PLR) transparency policy with a focus on bank profitability and the policy rate impact on lending rates (Appendix).
6. Strengthening payment system digitalisation policy to improve transaction efficiency as well as the economic-financial digital ecosystem by: (i) fostering payment system innovation, which includes expanding (bank and non-bank) participation, the delivery channels (direct debit, bulk credit, requests for payment), as well as BI-FAST acceptance amongst the public, and (ii) continuing the Regional Payment Connectivity (RPC) initiative by expanding cross-border QRIS and implementing Fast Payment Interconnectivity.
7. Strengthening payment system policy ahead of the holy fasting month of Ramadan and Eid-ul-Fitr 1444 H by: (i) safeguarding the availability and reliability of the BI and industry payment systems, which includes monitoring the reliability of participants' systems to provide payment system transaction services, and (ii) ensuring the availability of Rupiah currency fit for circulation throughout the territory of the Republic of Indonesia, particularly ahead of Ramadan and Eid-ul-Fitr, through the SERAMBI program 2023, while providing Rp195 trillion of additional currency in circulation.
8. Strengthening international cooperation with other central banks and authorities in partner countries, while promoting trade and investment in priority sectors in synergy with relevant institutions. In addition, Bank Indonesia is continuing to collaborate with relevant government ministries/agencies to ensure a successful ASEAN Chairmanship in 2023, particularly in terms of the finance track.

Policy coordination with the (central and regional) Government and strategic partners is also strengthened constantly. To that end, coordination within the Central and Regional Inflation Control Teams (TPIP and TPID) is maintained by strengthening the National Movement for Food Inflation Control (GNPIP) in various regions. Furthermore, policy synergy between Bank Indonesia and the Financial System Stability Committee, is also strengthened continuously to maintain macroeconomic and financial system stability, while reviving lending/financing to priority sectors to support economic growth and exports, as well as advancing the green and inclusive economy and finance.

Global economic growth is predicted to exceed the previous projection. Bank Indonesia projects world economic growth to reach 2.6% in 2023 in response to the positive impact of economic reopening in China and fewer global supply disruptions. Economic growth in the United States (US) and Europe has exceeded the previous projections, accompanied by lower recession risk. The promising world economic outlook is expected to edge up non-energy commodity prices amid lower oil prices as supply disruptions are resolved. Such positive global economic developments and expectations of higher wages in line with tight labour markets in the US and Europe have prolonged the process of lowering global inflation, thus extending tight monetary policy in advanced economies for longer in 2023. Monetary policy tightening, together with the emerging issue of three bank closures in the US, is exacerbating global financial market uncertainty and, thus, restraining capital flows to developing economies and intensifying currency pressures in various jurisdictions. Bank Indonesia continues strengthening Rupiah stabilisation policy to mitigate the impact of global financial market uncertainty, including the contagion effect of bank closures in the US, on domestic financial markets and Rupiah exchange rates.

Economic growth in Indonesia remains solid on the back of increasing domestic demand and exports. Household consumption is expected to strengthen in line with increasing mobility in all regions, higher retail sales and growing consumer confidence. Investment is also solid, supported by the completion of national strategic projects (PSN) and increasing foreign direct investment (FDI) inflows. The promising domestic demand outlook is also supported by the knock-on effect of stronger exports. Exports of goods and services are expected to surpass the previous projection in line with the upgraded global economic outlook. As of February 2023, the latest developments point to high growth of Indonesian non-oil and gas exports, with increasing shipments of coal, metalliferous ores and crude palm oil (CPO) to China. In addition, inbound domestic and international travellers are also forecast to increase. Spatially, good export prospects are supported by a stronger regional economic outlook in Kalimantan, Sumatra and Sulawesi-Maluku-Papua (Sulampua). By sector, the manufacturing industry, wholesale and retail trade as well as transportation and logistics are expected to maintain robust growth. Consequently, national economic growth in 2023 is predicted have an upward bias towards the upper bound of the 4.5-5.3%.

Indonesia's Balance of Payments (BOP) remains sound, thereby supporting external resilience. The current account is predicted to record a surplus in the first-quarter of 2023, supported by a positive goods trade balance. In February 2023, Indonesia's trade surplus increased to USD5.48 billion from USD3.88 billion in January 2023. Cumulatively, foreign capital inflows to domestic financial markets, specifically portfolio investment, from the beginning of the year until 14th March 2023 recorded a net inflow of USD3.0 billion, despite outflows occurring in March 2023 triggered by rising global financial market uncertainty. The position of reserve assets in Indonesia increased to USD140.3 billion at the end of February 2023, equivalent to 6.2 months of imports or 6.0 months of imports and servicing government external debt, which is well above the international adequacy standard of around three months of imports. Overall, the BOP outlook for 2023 is good, with a manageable current account maintained in the range of a 0.4% surplus until 0.4% deficit from GDP. Meanwhile, the capital and financial account is expected to record a surplus, supported by foreign capital inflows in the form of FDI and portfolio investment in line with the positive perception of investors concerning the promising national economic outlook.

Rupiah stability has been maintained in line with BI stabilisation measures against a backdrop of increasing global financial market uncertainty. Consistent with broad-based currency depreciation triggered by rising global financial market uncertainty, the Rupiah slightly depreciated by 0.75% (ptp) in value as of 15thMarch 2023 compared with the level at the end of February 2023. Year-to-date, however, the Rupiah gained 1.32% on the level recorded at the end of December 2022, thus exceeding Rupee appreciation of 0.16%, as well as the depreciation experienced by the Baht (-0.04%) and Ringgit (-1.80%). Moving forward, Bank Indonesia expects to maintain Rupiah stability in line with the robust domestic economic outlook, low inflation, a current account surplus and attractive yields on domestic financial assets for investment. Furthermore, Bank Indonesia will continue strengthening Rupiah stabilisation policy to control imported inflation and mitigate the contagion effect of global financial market uncertainty on Rupiah exchange rates. Rupiah stabilisation policy has also been strengthened by DHE management through the implementation of foreign currency term deposits (TD) in accordance with market mechanisms.

Inflation is under control and supporting economic stability. Consumer Price Index (CPI) inflation in February 2023 stood at 5.47% (yoy), up slightly from 5.28% (yoy) one month earlier due to higher volatile food (VF) inflation of 7.62% (yoy). Core inflation continues to fall, reaching 3.09% (yoy), in line with lower inflation expectations, managed imported inflation and adequate aggregate supply in response to higher demand. Controlled inflation is the positive result of an optimal monetary policy response instituted by Bank Indonesia, coupled with close synergy between Bank Indonesia and the (central and regional) Government through the Central and Regional Inflation Control Teams (TPIP and TPID) as well as the National Movement for Food Inflation Control (GNPIP) in various regions. Bank Indonesia, therefore, is confident that core inflation will remain under control in the 3.0%±1% target corridor in the first semester of 2023 and CPI inflation will return to the 3.0%±1% target in September 2023 after the base effect of subsidised fuel price adjustments implemented last year fades. Bank Indonesia will continue strengthening coordination with the (central and regional) Government to control inflation, particularly ahead of the upcoming national religious holidays (HBKN).

Liquidity conditions in the banking industry and economy remain ample to continue reviving lending/financing. In February 2023, the ratio of liquid assets to third-party funds was still high at 29.09%. This is in line with the accommodative liquidity policy stance maintained by Bank Indonesia to support the availability of funds in the banking industry to disburse loans/financing to businesses. Liquidity in the economy also remains ample to support economic activity, as reflected by growth of the narrow money (M1) and broad money (M2) monetary aggregates at 6.6% (yoy) and 7.9% (yoy) respectively. With loose liquidity conditions, interest rates in the banking industry remain conducive to economic recovery. In the money market, the IndONIA rate as of 15thMarch 2023 remained low at 5.53%. The yield of short-term SBN increased 50bps on the level at the end of December 2022, while long-term yields were more stable. The 1-month term deposit rate in February 2023 was also recorded low at 4.12%, despite increasing 15bps on the level in December 2022. Meanwhile, the average lending rate in February 2023 was still conducive to support demand, namely at 9.34%. Bank Indonesia will continue ensuring adequate liquidity to maintain financial system stability and revive lending/financing for the national economic recovery.

The bank intermediation function continues to increase, thereby supporting efforts to strengthen economic growth. Credit growth in February 2023 rebounded across all sectors, from 10.53% (yoy) in January 2023 to 10.64% (yoy). Intermediation in the sharia banking industry also accelerated to 20.13% (yoy) in February 2023. Robust MSME credit growth persisted, particularly in terms of People's Business Loans (KUR) that totalled Rp5.87 trillion at the end of February 2023. Strong credit growth was driven on the supply side by adequate liquidity and loose lending standards in the banking industry, while demand for lending/financing is supported by corporate demand, including MSMEs, and improving household consumption. In addition to the accommodative liquidity policy implemented by Bank Indonesia, lending/financing is also encouraged by macroprudential incentives in the form of lower reserve requirements (RR) for banks extending loans to priority and inclusive sectors. Bank Indonesia will continue supporting the bank intermediation function to bolster the economic recovery.

Financial system resilience remains solid, particularly the banking industry, in terms of capital, credit risk and liquidity. The Capital Adequacy Ratio (CAR) in the banking industry was still high in January 2023 at 25.88%. Strong capital contributed to low NPL ratios of 2.59% (gross) and 0.76% (nett) in January 2023. Liquidity in the banking industry in February 2023 was maintained, supported by 8.18% (yoy) growth of third-party funds. Such strong conditions bolster banking industry resilience in Indonesia, with performance therefore unaffected directly by the dynamic bank closures occurring in the US. BI stress test simulations further confirmed that bank resilience would be maintained. Meanwhile, Bank Indonesia will continue strengthening synergy with the Financial System Stability Committee to mitigate various domestic and global macroeconomic risks that could undermine financial system resilience.

Digital economic and financial transactions are developing rapidly and driving economic activity. This is supported by the expansion of the digital economy as well as the availability and reliability of the digital payment system, coupled with rapid growth of digital banking. The value of electronic money transactions in February 2023 grew 31.14% (yoy) to reach Rp35.7 trillion. The value of digital banking transactions grew 28.35% (yoy) to reach Rp4,332.1 trillion and the value of transactions using ATM cards, debit cards and credit cards increased 9.61% (yoy) to reach Rp654.9 trillion. Meanwhile, total currency in circulation in February 2023 increased 2.71% (yoy) to reach Rp905.4 trillion. Bank Indonesia will continue ensuring the availability of quality Rupiah currency fit for circulation throughout the territory of the Republic of Indonesia. To that end, Bank Indonesia will strengthen payment system policy ahead of Ramadan and Eid-ul-Fitr 1444 H by ensuring the availability and reliability of the BI and industry payment systems, which includes monitoring the reliability of participants' systems to provide payment system transaction services. In addition, Bank Indonesia will ensure the availability of quality Rupiah currency fit for circulation through the SERAMBI program by strengthening public cash services offered by the banking industry and Bank Indonesia, while providing facilities to exchange currency at busy locations and strategic destinations on various routes for the annual exodus of Muslims returning to their family homes to celebrate Eid-ul-Fitr (mudik).

Jakarta, 16thMarch 2023

Communication Department

Erwin Haryono

Executive Director

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