The inflation rate, which rose precipitously in previous months due to increasing prices of fuel and imported goods, has begun to subside. Bank Indonesia (BI) again raised its benchmark interest rate by 25 basis points.
BENEDIKTUS KRISNA YOGATAMA
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JAKARTA, KOMPAS —Bank Indonesia (BI) again raised its benchmark interest rate by 25 basis points to 5.75 percent on Thursday in a bid to curb core inflation within the central bank target of 2-4 percent in the first half of 2023.
The inflation rate, which rose precipitously in previous months due to increasing prices of fuel and imported goods, has begun to subside.
The increase in the benchmark interest rate or BI 7-Day Reverse Repo Rate (BI7DRR) was decided at the BI Board of Governors Meeting (RDG) on Thursday (19/1/2023). It was the sixth-consecutive increase since August 2022. The central bank has since increased the reference rate by 225 points to 5.75 percent at present.
"The decision to increase interest rates in a more measured manner is a follow-up step to ensure the inflation expectations and core inflation continue to decline going forward," BI Governor Perry Warjiyo said at a press conference in Jakarta on Thursday.
Perry said the increase in the benchmark interest rate was sufficient to achieve the core-inflation target of 2-4 percent in the first semester of 2023 and headline inflation target of 2-4 percent in the second semester of 2023.
Based on data from the Statistics Indonesia (BPS), the headline inflation at the end of December 2022 reached 5.51 percent on an annual basis. The core inflation reached 3.36 percent. The headline inflation throughout 2022 exceeded BI’s target of 2-4 percent. Meanwhile, the core inflation was also above the target of 2-4 percent.
Since BI started raising its benchmark interest rate, inflationary pressures have continued to subside, even declining faster than predicted. In September 2022, market consensus predicted the headline inflation by the end of 2022 would amount to 6.5 percent. It turned out that the realization was lower at 5.51 percent.
The core inflation, which was recorded at 3.36 percent at the end of 2022, was also lower than market consensus of 4.61 percent in September 2022.
In addition to controlling inflation, BI also continues to maintain rupiah stability. One of the efforts to maintain rupiah stability is by issuing term deposits (TD) instruments in foreign currency for export proceeds (DHE) with competitive interest rates.
BI’s senior deputy governor Destry Damayanti explained that the foreign currency TD instrument was issued in 2022 because at the time, exports were quite high, but the export earnings or DHE did not enter the banking system. In fact, DHE is needed to increase the domestic supply of US dollars so that the stability of the rupiah can be maintained.
Departing from that, BI issued a foreign exchange TD specifically to attract DHE so that it could enter the Indonesian financial system.
According to Perry, DHE from exporters kept in banks will be forwarded to BI. Furthermore, BI will provide interest rates on foreign currency deposits, the amount of which is competitive with interest abroad. "Foreign currency TD will likely begin to be implemented in mid-February 2023," said Perry.
Quoting the Jakarta Interbank Spot Dollar Rate (JIS-DOR), the rupiah exchange rate was recorded at Rp 15,113 per US dollar at the close of trading on Thursday (19/1/2023)
Bank Mandiri economist Faisal Rachman said the increase in BI's benchmark interest rate was in line with market estimates. He estimated that BI would keep the benchmark interest rate at 5.75 percent until the end of this year in line with the slower pace of the US central bank's benchmark interest rate increase.
Researcher at the Institute for Economic and Social Research (LPEM) of the School of Economics and Business, the University of Indonesia (FEB UI), Teuku Riefky, explained that an increase in the benchmark interest rate would put core inflation and headline inflation under control more quickly. Thus, the increase in the price of goods after the increase in the fuel prices could be controlled more effectively.