Bank Indonesia (BI) decided to increase its benchmark 7-day reverse repurchase rate on December 22, 2022, by 25 basis points to 5.5%. The central bank also raised its deposit facility and lending facility rates by the same amount to 4.75% and 6.25%, respectively.
“The decision to increase the interest rates in a more measured manner is a follow-up step for front-loaded, pre-emptive and forward-looking measures to ensure the continued decline in inflation and inflation expectations so that core inflation is maintained within the range of 2%-4%,” BI Governor Perry Warjiyo said at the briefing.
In addition, this step was taken as a form of assistance to the strong US dollar exchange rate, causing tension in global financial markets. The stabilization measures taken by the central bank have also maintained the stability of the rupiah exchange rate amid global financial uncertainty.
BI announced that according to the 2022 BI Annual Meeting on November 30, 2022, the monetary policy in 2023 will focus on macroprudential pro-stability, payment system digitalization, money market deepening, as well as economic and inclusive and green finance. BI also stated that its banking interest rates were still relatively conducive to support economic recovery.
In this case, the central bank will coordinate with the government, regional administrations, and strategic partners to monitor inflation. Therefore, BI can maintain macroeconomic and financial sector stability, encourage credit/financing to the business world in priority sectors, and support economic growth and improvement, and exports. BI will also continue strengthening its policy response to reduce inflation and inflation so that core inflation remains stable.
Thus inflation and monthly inflation will continue to decline and be lower than the initial estimate, although it is still relatively high at 5.42% (YoY) above the target of 3.0%.
Global economy impacts
The goal, however, is overshadowed by a declining global economy accompanied by high movements in 2023. It is estimated that economic performance is still slowing down, with a fairly high risk of recession in several countries including the United States and Europe. This uncertainty was influenced by the fragmentation of the economy, trade and investment due to political pressure as an aggressive monetary policy in developed countries such as the US and Europe.
BI had forecast world economic growth of 3% in 2022, but this growth will fall to 2.6% in 2023. Meanwhile, inflation is still projected to be higher despite being predicted as this forecast is driven by supply chain disruptions and a tight labor market, especially in the US and Europe.
According to the Fed, they will increase the Fed Funds Rate in early 2023 to strengthen the US dollar by taking into account global money market offers.
Digitalization is key to economic recovery
BI said in its press statement that Indonesia’s domestic economic growth would remain good as it would be influenced by people’s purchasing power and the confidence of economic actors. The extension is shown in the results of a BI survey on consumer confidence, retail sales, and the Manufacturing Purchasing Managers’ index (PMI).
Export performance is expected to remain strong, driven by exports of coal, CPO, iron, and steel, as well as exports of services. This performance was also supported by strong economic growth in Kalimantan, Sumatra, and Sulawesi-Maluku-Papua (Sulampua).
To keep the domestic economy stable, BI will also promote payment system efficiency improvements through policies to strengthen and accelerate digitalization to maintain the momentum of economic recovery.
