BI's Long-Expected, Inflation-Driven Rate Hike



Bank Indonesia (BI) announced the results of the Board of Governors' meeting for the August 2022 period on Tuesday (8/23). The Indonesian central bank finally decided to raise the benchmark interest rate for the first time since November 2018. As a result, the BI 7-Day Reverse Repo Rate (BI7DRR) increased by 25 basis points, reaching 3.75%. In addition, the deposit facility rate increased by 25 basis points to 3%, and the lending facility rate increased by 25 bps to 4.5%. This policy is implemented as a preemptive step and a future perspective from the increase in non-subsidized fuel prices and an increase in core inflation due to the volatile food prices and other factors. This policy is also aimed at strengthening the stabilization of the Rupiah exchange rate, aligning with its fundamental value during high apprehension in global financial markets and amidst increasingly strong domestic economic growth. Bank Indonesia Governor, Perry Warjiyo, stated that the interest rate hike is also an effort to re-attract foreign capital inflows to Indonesia's market following the initial outflow caused by Fed's rate hike. Despite rippling positive sentiments across the market, this Board of Governors meeting results differ from analysts' initial expectations. CNBC Indonesia's consensus states that most institutional respondents expected BI to maintain its benchmark interest rate at 3.5%. Furthermore, the Minister of Finance, Sri Mulyani, responded positively to the interest rate hike, stating that the government respects BI's decision. Sri Mulyani believes Bank Indonesia had made reasonable calculations considering various factors, including the balance of payments and exchange rates.


In line with this decision, Bank Indonesia bolstered its policy mix response to maintain stability and strengthen the recovery through some major points. They intend to enhance monetary operations through an increase in the money market's interest rate structure following the BI 7-Day Reverse Repo Rate (BI7DRR) to mitigate the risk of rising core inflation. Another decision is to strengthen the stability of the Rupiah exchange rate as part of controlling inflation by intervening in the foreign exchange market through spot transactions and the Domestic Non-Deliverable Forward (DNDF). Bank Indonesia has also decided to increase the quantity of SBN transactions on the secondary market to strengthen the Rupiah exchange rate by increasing the attractiveness of SBN yields, taking into account that inflationary pressure is more short-term and will return to its initial target in the long run. Another major point is strengthening the synergy between central and regional governments to maintain price stability and improve food security through Coordination Meetings of the Inflation Control Team, as well as accelerating the implementation of the national movement to control food inflation. The central bank has also implemented incentive policies for banks that disburse financing to priority sectors and MSMEs. These decisions that the BI board of governors has made are all measures to support economic recovery and accelerate digitization throughout Indonesia.


Governor of Bank Indonesia (BI) Perry Warjiyo estimates that Indonesia's economic growth will reach 5.5% in the third quarter of 2022. He conveyed this statement in the Monthly Board of Governors' Meeting (RDG) press release. In addition, he then projected data supporting said outlook. First, the improvement in the domestic economy is becoming more evident, specifically in the second quarter of 2022, seeing how Indonesia's economic growth reached 5.44% year-on-year higher than the achievement in the first quarter of 2022, which was 5.01% year-on-year. Second, additional improvement was also reflected in the performance of most business fields, especially in the manufacturing industry, transportation, warehousing, and retail trade. Correspondingly, the economy looks to be improving spatially, especially in Java, Sumatra, Sulawesi, and Papua. Third, various early indicators and BI surveys are showing improvements up until July 2022, such as the Consumer Confidence Index (IKK), Real Sales Index (IPR), and Manufacturing Purchasing Managers' Index (PMI). Fourth, strong external conditions, supported by exports until July 2022, continued to grow, reflecting the current account surplus for the trade balance in the second quarter of 2022, which recorded 1.1% of gross domestic product (GDP). Therefore, Perry ensures that the government and BI will continue to maintain stability and encourage economic growth amid uncertain and volatile economic conditions.


Sources:

Bank Indonesia

Bisnis

CNBC Indonesia



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