Indonesia’s economic indicators, such as the economic growth and inflation, were still better than those in many other countries that were seeing a potential for recession and hyperinflation.
By
BENEDIKTUS KRISNA YOGATAMA, SIMON P SARAGIH S
·4 minutes read
KEVIN DIETSCH/GETTY IMAGES/AFP
Federal Reserve Board Chairman Jerome Powell speaks during a news conference after a Federal Open Market Committee meeting on February 01, 2023 in Washington, DC. The Federal Reserve announced a 0.25 percentage point interest rate increase to a range of 4.50% to 4.75%.
JAKARTA, KOMPAS — The decision of the United States’ central bank, the Federal Reserve (Fed), to raise its benchmark interest rate by 25 basis points to a range of between 4.5 percent and 4.75 percent on Wednesday (1/2/2023) has not affected the rupiah exchange rate against the US dollar. Indonesia's healthy economic performance has attracted global investors to place their funds in Indonesia, so the rupiah has strengthened.
According to the Jakarta Interbank Spot Dollar Rate (Jisdor), the rupiah had strengthened to Rp 14,868 per US dollar at the close of trading on Thursday, up from Rp 14,991 per US dollar on Wednesday.
The Fed’s increasing in its short-term benchmark rate has raised the target range to between 4.5 percent and 4.75 percent, the highest level since 2007. The Fed’s rate hikes have the potential to continue, as inflation remains high.
“Inflation has subsided, but not as expected. Therefore, we must not be complacent,” Federal Reserve Chair Jerome Powell told a press conference in Washington on Wednesday (1/2/2023).
US inflation has fallen from a peak of 9.1 percent in June 2022 to 7.1 percent in November. In December 2022, US inflation is expected to decline to 6.5 percent. The main cause of rising inflation in the US is the massive economic stimulus from the former administration of Donald Trump to the current administration of President Joe Biden.
Powell said the effect of the rate increase had already been felt in the market, such as weakening demand. The US economy grew only 1 percent in 2022 as a result of interest rate hikes throughout the year. It was likely that US economic growth would slow in 2023, but Powell expected the economy would still grow.
Powell said it was impossible to predict when interest rates would fall again. The Fed’s main task, he said, was to reduce inflation by increasing interest rates and gradually withdrawing the money supply through the sale of third party bonds that had been previously purchased from the market.
AFP/ROSLAN RAHMAN
A staff counts US dollar currency notes at a money changer booth at Raffles Place financial business district in Singapore on October 6, 2022.
Meanwhile, according to Bank Permata chief economist Josua Pardede, the Fed's decision to raise its interest rates would not trigger capital outflow from Indonesia. The rupiah exchange rate would also remain stable.
The rupiah rate strengthened against the US dollar despite the Fed’s rate hike, which had often caused fund outflows previously. This was likely because global investors were continuing to place their funds in the Indonesian financial market. They considered the risks in investing in Indonesia were still relatively small.
Indonesia’s economic indicators, such as the economic growth and inflation, were still better than those in many other countries that were seeing a potential for recession and hyperinflation.
"The inflow of foreign funds has kept the rupiah relatively stable, and [the rupiah] has even strengthened recently," said Josua, who was contacted on Thursday in Jakarta.
Less aggressive
Citing data from Bank Indonesia (BI), the amount of foreign funds that had entered the Indonesian financial market through the purchase of sovereign debt papers (SBN) had reached Rp 48.08 trillion from the beginning of the year to 26 Jan. 2023. Net SBN sales among foreign investors reached Rp 6.83 trillion. The rupiah had strengthened because the amount of fund inflow was larger than the amount of fund outflow.
In response to the latest increase in the Fed's benchmark interest rate, BI is expected to raise its benchmark interest rate one more time by 25 basis points to 6.00 percent. The increase is still needed to keep core inflation below 4 percent in the first half of this year.
Meanwhile, Bank Mandiri economist Faisal Rachman estimated that the Fed would not be as aggressive in raising its benchmark interest rate this year as it had been last year, as the US inflation rate had started to slow. The Fed's rate increases were expected to end in the first half of this year.
Nevertheless, Faisal said, with domestic inflation relatively under control, a stable rupiah exchange rate, and Indonesia's positive economic growth, it was unlikely that BI would raise its benchmark interest rate again before the end of the year.
“We believe that inflation in the country will decrease. The rupiah exchange rate will remain stable, as foreign funds continue to enter the country. Thus, BI can maintain its interest rate at the current level," he said. (REUTERS/AP/AFP)
This article was translated by Hendarsyah Tarmizi.
