BI Projects Rupiah Exchange Rate to Strengthen to IDR 15,800 Per US Dollar in Quarter IV-2024

BI estimates that the rupiah will strengthen to an average of IDR 15,800 per US dollar in the fourth quarter of 2024.

KOMPAS/AGUSTINUS YOGA PRIMANTORO

BCA Economist David Sumual provided a statement to the media during the Journalism Training held by Bank Indonesia in Samosir Regency, North Sumatra, on Sunday (28/4/2024).

SAMOSIR, KOMPAS — Bank Indonesia projects that the rupiah exchange rate will gradually strengthen in semester II-2024. BI estimates that the rupiah exchange rate against the US dollar will average IDR 16,200 in the second quarter of 2024, IDR 16,000 in the third quarter of 2024, and IDR 15,800 in the fourth quarter of 2024.

Assistant Governor of the Communications Department of Bank Indonesia (BI), Erwin Haryono, Sunday (28/4/2024), explained that the decision to increase the BI Rate by 25 basis points shows that the risk of uncertainty faced is not that big. However, this dynamic still needs to be responded to with preemptive and forward looking policies.

"It is said to be a preemptive and forward looking effort so that the impact (uncertainty) does not continue. There are several potential risks that must be anticipated and so that they don't happen, we respond now. "So, it's not based on the short term," he said on the sidelines of a Journalist Training event in Samosir Regency, North Sumatra.

In the last month, the US dollar has strengthened against various other currencies, including the rupiah. This development follows the United States' central bank, the Federal Reserve (The Fed), which gave a signal that it would keep the benchmark interest rate high for longer than initially planned.

This change occurred because the US inflation is still above the target of 2 percent. At the same time, the heating up of geopolitical tensions in the Middle East increases the risk of a surge in world oil prices.

Erwin added that the increase in BI's benchmark interest rate is necessary to make government bond yields more attractive compared to other developing countries. If it is not raised, there are concerns that the selling actions of foreign portfolio investors will become even more intense.

Based on transaction data from April 22-25, 2024, foreign investors in the domestic financial market still record a net sell of Rp 2.47 trillion. The selling activity of non-resident investors has decreased significantly compared to the period of April 16-18, 2024 which reached Rp 21.46 trillion.

However, from the beginning of 2024 until April 25, 2024, foreign investors in the domestic financial market recorded a net selling of Rp 28.56 trillion. This consisted of a net selling of Rp 47.26 trillion in the State Securities market (SBN), a net buying of Rp 9.68 trillion in the stock market, and a net buying of Rp 9.02 trillion in the Indonesian Bank Securities (SRBI).

BI has intervened through foreign exchange in its foreign exchange reserves. It's just that it's impossible to keep relying on it.

On the other hand, the exchange rate of the rupiah continues to experience depreciation, reaching levels of Rp 16,000 per US dollar in line with the strengthening of the US dollar index (DXY) against major currencies at 106 basis points. As of the calendar year until April 23, 2024, the rupiah has weakened by 5.07 percent.

"BI has already intervened through foreign exchange in the foreign reserve. However, it is not possible to constantly rely on that. Moreover, there is an escalation of uncertainty, including geopolitics, so we assess that it is time for the BI Rate to be raised," said Erwin.

KOMPAS/ADRYAN YOGA PARAMADWYA

Bank Indonesia Governor Perry Warjiyo answered a journalist's question during a press conference following the Board of Governors Meeting of Bank Indonesia in Jakarta on Wednesday (20/3/2024).

Director of the Monetary Economic Policy Department of Bank Indonesia (BI), Juli Budi Winantya, stated that BI continues to monitor developments in the US benchmark interest rate and geopolitical situation as indicators for policy response consideration. These two factors are responded to by implementing interest rate policies to maintain the stability of the rupiah exchange rate.

In a press conference held by the Board of Governors of BI last week, BI Governor Perry Warjiyo estimated that the rupiah will remain stable at around IDR 16,200 per US dollar in the second quarter of 2024 and strengthen towards an average of IDR 16,000 per US dollar in the third quarter of 2024. The rupiah is then expected to strengthen again towards an average of IDR 15,800 per US dollar in the fourth quarter of 2024.

Also read: Get Ready for a High Cost Economy in 2024

According to Juli, the strengthening of the rupiah will be in line with the influx of foreign capital which in turn becomes foreign reserves. Thus, a long-term increase in interest rates is expected to make the rupiah strengthen again.

"In terms of encouraging growth, there are other instruments that will later be given incentives," said Juli.

Therefore, BI assesses that the impact of increasing interest rates on the real sector and economic growth is relatively limited. In the second quarter of 2024 and the third quarter of 2024, economic growth is estimated to still be higher than the fourth quarter of 2023 at 5.04 percent. Overall, Indonesia's economic growth in 2024 is predicted to be around 4.7-5.5 percent.

BENEDIKTUS KRISNA YOGATAMA

Amount of Incentives for Macroprudential Liquidity Incentive (KLM) Policy Stages. Source: Bank Indonesia

Through the Macroprudential Liquidity Incentive Policy (KLM), BI expects an additional bank liquidity of Rp 81 trillion by mid-2024. Thus, the total incentive provided will be Rp 246 trillion. This policy will be given to the banking sector that channels credit to leverage sectors with low risk profiles.

PT Bank Central Asia Tbk (BCA) economist, David Sumual, believes that the additional liquidity can be utilized by the banking industry and can have a multiplier effect on the domestic economy. Even the previous increase in benchmark interest rates is considered to have an insignificant impact on bank loan interest rates.

"Until now, we project economic growth to be around 5-5.2 percent. In terms of credit, the credit growth is relatively around 10 percent. Therefore, there has not been a significant influence (from the increase in benchmark interest rates) as long as the variables move drastically that can affect expectations," said David.

Also read: BI Raises Reference Interest Rate to 6.25 Percent