The country's banks’ overall profitability should remain healthy, writes Barbara Pianese.

Bank Indonesia, the central bank of Indonesia, is expected to continue raising the policy rate. The bank aims to anchor inflation expectations and return core inflation closer to the middle of its 2% to 4% target range by the first half of 2023. Inflation expectations remain elevated at around 5.9% for year-end. 

The monetary tightening is likely to negatively affect banks’ net interest margins, according to Fitch Ratings. The rating agency expects the rise in funding costs to outpace asset yields as the policy rate rises. However, the banks’ overall profitability should remain healthy.

Some of the country’s biggest lenders saw net interest margin decreases even before the Covid-19 pandemic, with the figure further decreasing in 2020. However, last year the same banks made progress. Bank Rakyat Indonesia’s net interest margin jumped from 6% to 6.89% from 2020 to 2021; Bank Mandiri Persero went from 4.48% to 5.09%; CIMB Niaga from 4.32% to 4.86% while Bank Negara Indonesia reported a 0.2% increase. Bank Central Asia was the outlier in the group, with the figure slightly decreasing over the same period. 

Bank Indonesia will now be tasked with maintaining stability to support economic growth, rather than solely maintaining the currency’s value. As part of the new extended mandate, the central bank will also be able to directly purchase government bonds, as decided by the country’s parliament on December 15. 


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