BI’s Monetary Policy Becomes More Independent

KOMPAS/ELSA EMIRIA LEBA

Bank Indonesia logo.

JAKARTA, KOMPAS — The impact on the rupiah exchange rate from the interest rate hike of the United States Federal Reserve (Fed) is likely to be less significant. In this condition, Bank Indonesia’s monetary policy will more independent, especially from the influence of the Fed. For this reason, the central bank is confident about maintaining its benchmark rate, even though the Fed has raised its benchmark interest rate twice since March 2022 for a total of 75 basis points.

With the decline in the Fed’s influence on the stability of the rupiah exchange rate, BI's monetary policy can focus more on controlling inflation while continuing to encourage national economic recovery.

The BI Board of Governors Meeting (RDG) on 23-24 May 2022 decided to maintain the BI 7-Day Reverse Repo Rate (7DRR) at 3.5 percent, the deposit facility interest rate at 2.75 percent, and the lending facility interest rate at 4 .25 percent.

"The decision is in line with the need to control inflation and maintain exchange rate stability, as well as continue to encourage economic growth, amidst high external pressures related to the Russia-Ukraine geopolitical tensions and the accelerated normalization of monetary policies in a number of developed and developing countries," BI Governor Perry Warjiyo said during a virtual press conference on the meeting’s results, on Tuesday (24/5/2022) in Jakarta.

BI's move to maintain its interest rate has lowered the spread of the BI benchmark interest rate in line with the Fed rate. The Fed's current target rate ranges between 0.75 percent and 1 percent. The spread is currently very low compared to previous times.

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Perry believes that the Fed's policy to raise its interest rates will not have a significant impact on the stability of the rupiah exchange rate. This is because the foreign fund outflow from Indonesia (capital plight) is relatively minimal, in line with the decline in the portion of foreign ownership in government securities (SBN) and capital market shares.

According to data from the Finance Ministry’s Financing and Risk Management Directorate General, as of May 12, 2022, foreign ownership in SBN was only 16.70 percent, far lower than around 40 percent before the Covid-19 pandemic.

According to Perry, Indonesia's ability to maintain a stable rupiah amid external pressures was also relatively strong at this time. This was partly due to the relatively large current account surplus, which was supported by the trade surplus.

KOMPAS/RADITYA HELABUMI

Information on discounted prices at the storefront of a shopping center in Jakarta, Tuesday (24/5/2022). Bank Indonesia still maintains the BI-7 Day Reverse Repo Rate at 3.5 percent. Although inflation continues to increase, it is estimated that it will still be under control.

In April 2022, Indonesia’s balance of trade recorded a surplus of US$7.6 billion, higher than the $4.5 billion recorded in the previous month. The trade surplus was supported by a significant increase in exports in line with rising commodity prices and strong demand from major trading partners. This resulted in an increase in foreign exchange reserves to $135.7 billion as of 28 April 2022, which was significant enough to maintain exchange rate stability.

Regarding inflation, Perry believed that inflation was still under control. BI was continuing to coordinate with the government (central and regional), through the Inflation Control Team (TPIP and TPID), to control the inflation rate. BI and the government were targeting 2-4 percent inflation this year.

“Inflation is still under control. Even if it exceeds the upper limit, it will only be slightly above 4 percent this year," said Perry.

Different conditions

Separately, executive director Mohammad Faisal of the Center of Reform on Economics (Core) Indonesia explained that in the past, the central bank tended to raise its rate in response to a Fed rate hike. However, the present situation was different, because the factors that affected monetary policy were also different.

“The risks from external factors are now declining, while domestically, growth incentives are still needed. So, BI decided to raise its interest rates," said Faisal.

Economist Ryan Kriyanto said the central bank’s decision to maintain its benchmark interest rate was the correct one, as the economic growth curve was currently on the rise. "So, the benchmark interest rate should be maintained to provide a dovish policy, or accommodative environment and signal," said Ryan.

We can expect the possibility that many developed countries will raise their interest rates in line with the high inflationary trend.

Finance Minister Sri Mulyani Indrawati previously said that both developed and developing countries were currently facing high inflation as an impact of the rise in global energy prices.

In many countries, she said, high inflation was also accompanied by an accelerated hike in the benchmark interest rate by central banks. "So, we can expect the possibility that many developed countries will raise their interest rates in line with the high inflationary trend," said Sri Mulyani. (BKY/DIM)

This article was translated by Hendarsyah Tarmizi.