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BI Rate Raised Amidst External Pressures

Updated: May 27, 2018

External pressures such as the uncertainty in global financial markets have led to the raise of BI’s interest rate on Thursday, May 17th 2018.

As many have predicted in the past months, Bank Indonesia has finally raised their benchmark interest rate on Thursday (5/17). The reason behind Bank Indonesia’s rate hike are stated to be primarily due to external pressures, including the looming uncertainty in global financial markets.

Bank Indonesias 7-day reverse repo rate was increased by 25 points to 4.5 percent and the lending and deposit rates were increased 25 points to 5.25 percent and 3.75 percent. It also affected the economic growth outlook at 5.1-5.5 percent. Agus Martowardojo, the Governor of Bank Indonesia, said that the national bank will continue to pay attention to the economic growth and is ready to take stronger measures to ensure that macroeconomic stability is maintained.

Many international and domestic incidents could affect Indonesia's economic stability in the future. Stocks, bonds, and the rupiah will surely be affected by the rate hike. Investing in the domestic capital market is believed to be a fragile decision for investors as a result of the increase.

External pressures initially started with the increase of United States' treasury yield, monetary tightening by the Fed, rising crude oil prices, the trade war between US and China, and the instability on the Korean peninsula.

National issues have also contributed to the decreasing demand of investors. Indonesia's current account deficit, the large month trade deficit in April 2018, and the terrorist attacks in the past couple of days, are some economic factors that may have negatively affected demand. The rupiah has also depreciated more than 5 percent to more than 14,000 per USD as Indonesian 10-year bond yields jumped more than 1 percent and the stock market index increased 0,29 percent to 5.832,85.

Many experts say that the increased interest rate will make Indonesian bonds more attractive and rupiah stronger. However, as of today (5/18) an alarming number of investors are selling their stocks; especially in such products as BBRI, BBCA, ADRO, UNTR, and BBNI.

Investors are still doubting the steps taken by Bank Indonesia. If it raises the interest rate again, the target set by the government to develop the economy up to 5.4 percent will become even harder to attain.



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