Bank Indonesia Stops Interest Rate Increase

BI will continue to anticipate the impact of the monetary tightening policy in the US by maintaining the stability of the rupiah exchange rate so that the imported inflation will not affect the domestic economy.

KOMPAS/PRIYOMBODO

An officer checks the physical condition of US dollar bills exchanged by customers at the foreign exchange exchange at Valuta Inti Prima in Cikini, Central Jakarta, Tuesday (3/1/2023).

JAKARTA, KOMPAS — Bank Indonesia (BI) has finally stopped the trend of increasing benchmark interest rates which has been going on for six months. This was marked by BI's move to hold the benchmark interest rate at 5.75 percent on Thursday. With the improved global and domestic economic conditions, the central bank is confident that the current benchmark interest rate is still sufficient to control future inflationary pressures.

Previously, due to the global economic uncertainty and its impact on domestic inflation pressures, the central bank persistently increased the BI-7 Day Reverse Repo Rate (BI7DRR) benchmark rate . From August 2022 until January this year, the total increase in the benchmark interest rate had reached 225 basis points (bps).

The global economic growth, which is expected to be better than the initial estimates following the ending of the Zero-Covid policy in China, and Indonesia's economic condition believed to remain solid throughout this year encouraged BI to maintain its benchmark interest rate at 5.75 percent during the BI Board of Governors Meeting, on Thursday (16/2 /2023).

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In line with the improving economic outlook, BI Governor Perry Warjiyo said the domestic inflationary pressure was also expected to ease this year. BI predicted that annual inflation would return to 3.5 percent in the second semester of 2023.

“Currently, core inflation and headline inflation has declined faster than expected. On that basis, we believe that the current interest rate is adequate, in the sense that there is no need for another increase," he said in a press conference following the meeting.

The latest data from Statistics Indonesia (BPS) shows that in January 2023 core inflation on an annual basis was recorded at 3.27 percent, lower than the 3.36 percent in the previous month. While in the same period, the headline inflation on an annual basis also fell from 5.51 percent to 5.28 percent.

KOMPAS/TOTOK WIJAYANTO (TOK)

An officer counts money using a counting machine at the Bank Mandiri Cash Center, Jakarta, Friday (18/11/2022).

The decline in inflation was partly due to the appreciation in the rupiah exchange rate at the beginning of the year. The rupiah exchange rate on 15 Feb. 2023 strengthened 2.39 percent from the level in December 2022. Based on the Jisdor exchange rate, the rupiah slightly rose to Rp. 15,176 per United States dollar at the close of the trading on Thursday.

The rupiah relatively performed better than the currencies of other developing countries, such as the Philippines (0.99 percent), Thailand (0.85 percent) and Malaysia (0.27 percent).

This will further reduce inflation.

BI predicts that going forward the rupiah will continue to strengthen in line with the improving economic outlook and strong domestic economic fundamentals. The strengthening of the rupiah has been driven by inflows of foreign capital into the domestic financial market, in line with positive investor perceptions of the prospects for the domestic economy. "This will further reduce inflation," Perry said.

Anticipation

Perry has acknowledged that there is still a risk resulting from high inflation in the US and Europe which are still relatively high as energy and food prices remained high and the labor market was still tight. With this condition, the US central bank, The Federal Reserve (The Fed), may further raise its benchmark interest rate to a level of 5.25 percent.

BI will continue to anticipate the impact of the Fed's tightening monetary policy by maintaining stability in the rupiah exchange rate so that imported inflation does not have an impact on the domestic economy. One of the measures was to ensure export proceeds (DHE) to be kept in local banks through the implementation of DHE foreign exchange (forex) monetary operations in accordance with market mechanisms, Perry added.

Also read:

> The Increase in Bank Indonesia’s Interest Rate

Researcher of the Macroeconomic and Political Economy Policy Study Group at the University of Indonesia's School of Economics and Business (LPEM FEB UI), Teuku Riefky, said BI's policy of holding back the benchmark interest rate hike was in line with predictions.

“Recent developments show that Indonesia's financial and monetary conditions are much better than the previous few months. The large foreign exchange reserves can also provide additional policy space to maintain the stability of the rupiah exchange rate," said Riefky.

This article was translated by Hendarsyah Tarmizi.