Mitigating the Fall of Rupiah, BI Aggressively Raises Interest
The increase in the Fed's interest rates and the increasing uncertainty in the global economy have encouraged the strengthening of the US dollar against other currencies.
By
BENEDIKTUS KRISNA YOGATAMA
·4 minutes read
JAKARTA, KOMPAS — The continual fall in the rupiah exchange rate against the US dollar coupled with inflation expectations, which are still high, prompted Bank Indonesia (BI) to aggressively raise its benchmark interest rate again by 50 basis points (bp) to 4.75 percent. The increase in the benchmark interest rate is expected to maintain the stability of the rupiah exchange rate as well as return inflation to the 2-4 percent target in semester I-2023.
The policy was decided at the Meeting of the Board of Governors (RDG) of Bank Indonesia which was held on Thursday (20/10/2022). This is an increase of 50 basis points in a row after BI did the same thing in the previous month. Meanwhile, in August 2022, BI raised interest rates only by 25 bp.
When presenting the results of the BI RDG meeting online on Thursday, BI Governor Perry Warjiyo explained that this decision is one of the ways to strengthen the rupiah exchange-rate stabilization policy so that it is in line with its fundamental value.
Since the beginning of the year until 19 October 2022, the rupiah has depreciated by 8.03 percent against the US dollar. Based on the Jakarta Interbank Spot Dollar Rate (JISDOR), the rupiah exchange rate closed at Rp 15,579 per US dollar on Thursday, lower than the previous day's closing at Rp 15,491 per US dollar.
Nevertheless, the depreciation of the rupiah exchange rate is still lower than other developing country currencies, such as the Indian rupee which weakened 10.42 percent, the Malaysian ringgit fell 11.75 percent and the Thai baht which fell 12.55 percent.
One of the reasons for the weakening of the rupiah exchange rate was the move by the United States central bank, The Federal Reserve (The Fed), which this year has been very aggressive in raising its benchmark interest rate. The Fed's benchmark interest rate is now at 3.25 percent.
The depreciation of the rupiah exchange rate is still lower than other developing country currencies.
Investors move their funds to US dollar-denominated assets because the yields are more attractive. In the midst of increasing uncertainty in the global economy, investors are increasingly encouraged to place their funds in the US market.
Based on BI data, from the beginning of the year until 13 October 2022, foreign parties made a net sale of Rp 170 trillion (US$10.99 million) in the Government Securities (SBN) market and a net purchase of Rp 71.85 trillion in the stock market.
Inflation expectations
Perry said the interest rate hike was also to accelerate the return of core inflation to the target, which is 3 percent plus minus 1 percent, which is projected to occur in the first half of 2023.
"The decision to increase interest rates is a front loaded, pre-emptive and forward-looking measure to reduce inflation expectations which are currently overshooting and ensure that core inflation will return to target in the first half of 2023," said Perry.
Citing the Statistics Indonesia (BPS), general inflation in September 2022 was 1.17 percent. The general inflation in September 2022 compared to September 2021 reached 5.95 percent and general inflation for the calendar for the current year 2022 was 4.84 percent.
Meanwhile, core inflation in September 2022 was 0.3 percent, core inflation in September 2022 compared to September 2021 reached 3.21 percent and core inflation for the current year 2022 calendar was 2.81 percent.
General inflation and core inflation have now exceeded BI's target for 2022, which is 3 percent plus or minus 1 percent.
Contacted separately, PT Bank Danamon Indonesia Tbk economist, Irman Faiz, said that BI's policy of aggressively raising interest rates was aimed at maintaining the rupiah exchange rate while keeping inflation expectations on track.
Raising the policy rate by 50 bps will slow capital outflows and reduce the rate of depreciation, which helps reduce inflationary pressure from imported products.
He assessed that BI's decision to raise interest rates by 50 bp was correct. In the future, Irman further said, BI may still raise its benchmark interest rate to offset the Fed's move, which is also expected to continue to raise interest rates.
Teuku Riefky, a researcher at the Economic and Community Research Institute, Faculty of Economics and Business, the University of Indonesia, said BI needs to stay one step ahead by raising interest rates by 50 bps to maintain rupiah stability amid the threat of capital outflow due to the Fed's rate hike and increasing global uncertainty.
"Raising the policy rate by 50 bps will slow capital outflows and reduce the rate of depreciation, which helps reduce inflationary pressure from imported products," he said.