Pondering Options

The move triggered questions whether Bank Indonesia had considered the impact of the reference rate increase. The following is an excerpt of an interview with Perry Warjiyo at his office yesterday.

ANTARA FOTO/SIGID KURNIAWAN

Governor of Bank Indonesia Perry Warjiyo.

After taking the job as governor of Bank Indonesia (BI) Perry Warjiyo held an additional board of governors meeting on Wednesday. At the meeting it was decided to increase the BI reference interest rate by 25 basis points to 4.75 percent. Two weeks ago, BI raised its reference rate by 25 points.

The move triggered questions whether BI had considered the impact of the reference rate increase. The following is an excerpt of an interview with Perry at his office on Wednesday.

What is BI’s main consideration in raising the reference interest rate?

What has happened in the United States since early February this year has transformed the financial landscape of the global economy. Starting from the replacement of the US Federal Reserve; the Fed’s plan to increase its reference rate three to four times this year and the expanding US fiscal deficit.

The yield of the US 10-year treasury bond at the end of this year is estimated at 3.35 percent. This triggered capital outflow from developed and developing countries to the US, strengthened the US dollar and weakened other currencies, including the rupiah.

We previously predicted the phenomenon was temporary and thought it would be sufficient to intervene to stabilize the rupiah exchange rate. However, before the end of April this year, we realized that the phenomenon was something permanent. We had two options: whether to let it weaken the rupiah or take a policy other than intervention. We are aware of the fact that intervention is not enough and should be followed by raising the reference interest rate.

Why so fast in raising the reference interest rate?

The global dynamic is so fast. The probability of the Fed Fund Rate (FFR) increase, which was low recently, has become high. When we live in uncertainty, should we wait? Or should we take preemptive action? BI chose to be preemptive. Do not wait until the FFR increases, otherwise the response will be too late. Thus, we chose to raise the reference interest rate measurably and combine it with a pro-growth policy, namely deepening the macroprudential, financial market, digital economy expansion and the sharia economy.

What is BI’s view of the impact of the rupiah weakening and the end of low-interest credit?

The weakening rupiah has a negative impact on the national economy and is more urgent than the impact of the interest rate increase. The impact of the reference rate increase will only take place in the next 1.5 years. We will try to “heal” the weakening rupiah by raising the reference interest rate. There will be a small impact in the form of increased bank credit interest rates. However, we will balance it with a macroprudential policy.

(HEN/IDR/NMP)