The Fed Maintains Interest Rates, Rupiah Strengthens Slightly

With a probability above 75 percent, BI estimates that the FFR will be cut once by 25 bps in December 2024.

AFP/GETTY IMAGES/GETTY IMAGES NORTH AMERICA /CHIP SOMODEVILLA

A reporter raised their hand to ask questions to Jerome Powell, the Governor of the Federal Reserve System of the United States (The Fed), during a press conference in the William McChesney Martin Building in March 2024 in Washington DC, United States.

JAKARTA, KOMPAS — The Central Bank of the United States, The Federal Reserve or The Fed, has decided to maintain its benchmark interest rate. This decision made the rupiah exchange rate against the United States dollar strengthen slightly. However, this era of high interest rates will have an impact on Indonesia's economic growth and banking performance.

The Fed decided to maintain the benchmark interest rate (Fed Fund Rate/FFR) at the level of 5.25-5.5 percent through the Federal Open Market Committee (FOMC) meeting on Wednesday (1/5/2024) local time. This decision was made based on considerations of United States (US) inflation data which still exceeds the expected rate of 2 percent.

In the future, the Fed will most likely not pursue a policy of increasing the FFR to reduce the rate of inflation. Thus, the Fed's current policy focus is to maintain strict policy stance.

"So, in my opinion, the likelihood of the next interest rate policy being a hike is small. I would say, it is most likely not going to happen," said US Federal Reserve Governor Jerome Powell in a FOMC press conference as reported by Reuters.

BANK INDONESIA

The table shows the development of global policy interest rates as of April 20 2024.

He added that other countries and financial markets are adapting well to economic growth and monetary policy divergence with the US. This is happening without any turbulence in emerging markets that has marked such divergence in the past.

Because, according to Powell, the majority of developing countries have established good monetary policy frameworks that are more credible in controlling inflation. "For developing countries, we haven't seen the turmoil like what happened 20 years ago, 30 years ago," Powell said.

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

Based on the results of the Bank Indonesia (BI) assessment, there will be three scenarios for future FFR dynamics. First, the possibility of a one-time FFR cut of 25 basis points (bps) in December 2024 with a probability of above 75 percent.

This development caused many Asian emerging market (developing country) currencies to strengthen, including the rupiah.

Secondly, FFR will not decrease in 2024 and will only be cut by 50 bps in the first quarter of 2025 with a probability of 50-75 percent. Thirdly, FFR will remain high for a longer period and only decrease by 25 bps in 2025 with a probability of less than 50 percent.

Head of the BI Monetary Management Department, Edi Susiato, Thursday (2/5/2024), said that the latest statement from the Fed was interpreted by some market players as a rather loose (dovish). This has led market players to speculate that the Fed's FFR cut will be further advanced, from October/November 2024 to September 2024.

"This development has caused many Asian emerging market (developing country) currencies to strengthen, including the rupiah," he said when contacted from Jakarta.

Citing Jakarta Inter Spot Dollar (Jisdor) data on Thursday (2/5/2024), the rupiah closed at a level of Rp 16,202 per US dollar or strengthened by 0.45 percent compared to the previous market close. However, the rupiah is still above the level of Rp 16,000 per US dollar for almost two consecutive weeks since the reopening of the rupiah spot market after the Lebaran holiday.

BI predicts that the rupiah will gradually strengthen until the end of 2024. In the second quarter of 2024, the rupiah against the US dollar is expected to strengthen on average to the level of Rp 16,200, Rp 16,000 in the third quarter of 2024, and Rp 15,800 in the fourth quarter of 2024.

Also read: Response to BI Rate Increase, Stimulus Needed

Separately, economist Macroeconomics and Financial Markets Research Institute for Economics and Society, Faculty of Economics and Business, University of Indonesia, Teuku Riefky, added that so far the market consensus does not see the Fed increasing reference interest rate. The market only expects the FFR to be cut or maintained.

"At present, it seems that the expectations have not changed, thus there is no additional pressure on the exchange rate of rupiah or capital flows in several developing countries," he said when contacted from Jakarta.

According to Riefky, the decision of The Fed not only affects Indonesia, but also all central banks in the world. The decision will be a consideration for central banks in determining their monetary policy responses.

BANK INDONESIA

The graph shows the development of the United States inflation rate until March 2024. Source: Bank Indonesia presentation

Impact of BI Rate increase

Previously, Bank Indonesia (BI) through the BI Board of Governors Meeting, Wednesday (24/4/2024), decided to increase its benchmark interest rate (BI Rate) by 25 bps to 6.25 percent. This decision was taken to strengthen the stability of the rupiah exchange rate from the impact of worsening global risks and as a pre-emptive and forward looking step so that inflation remains within the target of 1.5-3.5 percent. in 2024 and 2025.

Global risks anticipated by BI include the outflow of foreign portfolio investment and the depreciation of the rupiah in line with sentiment about delaying the Fed's interest rate cut and the escalating conflict in the Middle East. From the beginning of the year until April 22 2024, foreign portfolio investment recorded net sales (net outflow) of 1.3 billion US dollars. On the other hand, the rupiah exchange rate against the US dollar from the beginning of the year to April 23 has depreciated by 5.07 percent.

LPPI Senior Faculty Moch Amin Nurdin said that BI's decision to increase its benchmark interest rate to 6.25 percent is still relevant to strengthen the rupiah by attracting portfolio investment (capital inflow). This is because global uncertainty has resulted in the US dollar strengthening against other countries' currencies and affecting the domestic economy.

TANGKAPAN LAYAR

The Executive Head of Banking Supervision at the Financial Services Authority (OJK), Dian Ediana Rae, explained the developments in the banking sector during the OJK Monthly Commissioner Meeting in March 2024, held online on Tuesday (2/4/2024).

However, according to Amin, the increase in benchmark interest rates has the potential to slow down domestic economic growth and put pressure on people's purchasing power. Nevertheless, some parties remain optimistic that Indonesia's economic growth will continue to grow within the range of 4.5-5.5 percent.

"If (the high benchmark interest rate) lasts for a long time, it is doubtful that the economy will grow at that range," he said when contacted.

Apart from that, the increase in the BI Rate will have an impact on the domestic financial sector, including the banking industry. However, so far, the banking industry has not made any adjustments to the increase in the benchmark interest rate (wait and see).

There may be a correction to the target for credit growth and third-party funds (DPK) growth by mid-year, in order to maintain the banking industry's good performance.

Based on the credit base interest rate assessment (SBDK), the response of SBDK in February 2024 to the increase in BI rate is recorded as stable or slightly increasing, at a level of 8.83 percent. The increase in SBDK still occurred in the Regional Development Banks (BPD) and Foreign Bank Branch Offices (KCBA) groups, with each rising 14 bps and 8 bps to 9.37 percent and 6.84 percent, respectively.

"If the current condition does not change, there may be a correction in raising the interest rate. In fact, there may be a correction in the target in the middle of next year, both for credit growth and third party funds (DPK) growth, so that banking performance remains good," he said.

In the first quarter of 2024, bank credit grew by 12.40 percent annually, supported by credit growth in almost all sectors of the economy. Meanwhile, as of March 2024, deposit growth was recorded at 7.44 percent annually.

Also read: BI Interest Rates Rise, Bank Credit Distribution Risks Slowing

Director Main PT Bank Tabungan Negara (Persero) Tbk or BTN Nixon LP Napitupulu, Thursday (25/4/2024), stated that an increase in the BI Rate would have the potential to result in funding liquidity becoming more expensive . Therefore, BTN anticipates holding back the rate of credit growth to 10-11 percent in 2024.

"If the price of raw goods is expensive, there is no need to push the sales too much. Indeed, previous credit growth was good and contributed to economic growth. "However, in fact, funding is now more expensive," he said at a press conference presenting BTN's performance for the first quarter of 2024 in Jakarta (Kompas.id, 26/4/2024).

KOMPAS/PRIYOMBODO (PRI)

Officials from Bank Indonesia prepare new currency of various denominations at the integrated mobile cash service held by Bank Indonesia and banks at Istora Senayan, Jakarta, on Thursday (28/3/2024). The exchange of new currency will take place for four days until Sunday (31/3/2024).