According to the latest data from Statistics Indonesia (BPS), the headline inflation in June 2022 was 0.61 percent, a slight increase from 0.40 percent in May 2022.
By
BENEDIKTUS KRISNA YOGATAMA
·4 minutes read
JAKARTA, KOMPAS — Bank Indonesia (BI) has decided to keep the benchmark interest rate steady despite the rise in inflation and the weakening of the rupiah. The central bank says there is no need to raise the interest rate because it believes core inflation is still under control. BI will maximize its policy mix and monetary operations to maintain exchange rate stability.
The BI board of governors meeting on 20-21 July decided to maintain the BI 7-Day Reverse Repo Rate (BI7DRR) at 3.5 percent, the deposit facility interest rate at 2.75 percent and the lending facility interest rate at 4.25 percent.
In a press conference following the meeting in Jakarta on Thursday (21/7/2022), BI Governor Perry Warjiyo explained that although headline inflation had continued to increase, core inflation was still under control. Core inflation excludes changes in food and energy prices, which tend to be more volatile.
“The decision to maintain interest rates is consistent with core inflation forecasts that are still under control," said Perry.
According to the latest data from Statistics Indonesia (BPS), the headline inflation in June 2022 was 0.61 percent, a slight increase from 0.40 percent in May 2022. The inflation for the calendar year (January-June 2022) reached 3.19 percent while the annual inflation for June reached 4.35 percent.
Core inflation for the 2022 calendar year reached 1.82 percent, and annual core inflation reached 2.63 percent.
Meanwhile, core inflation in June was 0.19 percent, which continued to decline from 0.23 percent in May and 0.36 percent in April. Core inflation for the 2022 calendar year reached 1.82 percent, and annual core inflation reached 2.63 percent.
Regarding the stability of the rupiah exchange rate, Perry said the rupiah, like a number of other currencies, had declined due to the uncertainty of global financial markets. From the beginning of this year until July 20, the rupiah exchange rate against the US dollar had depreciated 4.90 percent. But the value of rupiah was better than the Malaysian ringgit, which had depreciated 6.41 percent, the Indian rupee, which had declined 7.07 percent, and the Thai baht, which had dropped by 8.88 percent.
“The depreciation is in line with the high uncertainty in global financial markets due to more aggressive monetary policy tightening in a number of countries. Such a policy is needed to respond to increasing inflationary pressures and concerns about a global economic slowdown amid perceptions of Indonesia's economic prospects that remain positive," Perry said.
To maintain the rupiah’s stability, Perry explained, the central bank would further strengthen monetary operations. BI would, among other measures, push for an increase in the interest rate on the money market and the interest rate of the government bonds (SBN) on the secondary market. In addition, it would intervene in the foreign exchange market to support monetary operations. With such a policy, the yields of government bonds would remain competitive so that the outflow of funds that could weaken the rupiah exchange rate could be prevented.
Driving growth
Teuku Riefky, a researcher at the Institute for Economic and Community Research at the University of Indonesia’s
School of Economics and Business, hailed BI’s decision to maintain interest rates.
"BI needs to continue to support the economic recovery, which is still going on," he said.
By maintaining interest rates, bank lending rates remain low, which can stimulate bank lending. An expected increase in lending is expected to push up household consumption, which in turn will encourage economic growth. On the other hand, to absorb excess liquidity after the COVID-19 pandemic, BI will use other instruments, namely increasing the percentage of bank reserves (GWM).
As for maintaining exchange rate stability, Riefky assessed that BI still had sufficient foreign exchange reserves for intervention in the money market. As of 30 June, Indonesia's foreign exchange reserves were US$136.37 billion.
With the expected increase in inflation and rising global pressures, Faisal estimated BI would increase its interest rate by 75 basis points to 4.25 percent by the end of the year.
Meanwhile, Bank Mandiri economist Faisal Rachman said that although BI had maintained its benchmark interest rate, he predicted that the era of BI's easy monetary policy would end this year. With the expected increase in inflation and rising global pressures, Faisal estimated BI would increase its interest rate by 75 basis points to 4.25 percent by the end of the year.
Meanwhile, the Asian Development Bank (ADB) in its Asian Development Outlook report released on Thursday (21/7) projected that Indonesia's economic growth would reach 5.2 percent this year. The growth is expected to be supported by increasing economic activities and stable export growth.
"The estimated economic growth this year is supported by economic activities in Indonesia, which continue to return to normal as the number of Covid-19 cases is under control," ADB Director for Indonesia Jiro Tominaga said in a statement.
The ADB’s estimated growth for Indonesia is higher than its estimate of 5 percent in April. The revised growth forecast is in line with the increase in the projection for Southeast Asia's economic growth. (BKY)
(This article was translated by Hendarsyah Tarmizi).