June 23, 2023
JAKARTA – Bank Indonesia (BI) has kept its key interest rates unchanged for the fifth month in a row despite a hawkish stance from the United States Federal Reserve (Fed), which is widely expected to tighten monetary policy further this year.
Following its monthly policy meeting on Thursday, the central bank said the decision was consistent with its target to keep the annual inflation rate between 2 percent and 4 percent.
Its effort is currently focused on keeping the rupiah’s exchange rate stable and mitigating potential adverse effects on Indonesia’s economy from global financial markets.
BI announced that the benchmark rate would remain at 5.75 percent, while the deposit and lending facility rates were also kept unchanged at 5 percent and 6.5 percent, respectively.
The decision was in line with forecasts from BCA, Bank Mandiri and Permata Bank.
Core inflation, which has become the de-facto basis for BI’s interest rate policy, eased to 2.66 percent in May from 2.83 percent in the preceding month. Core inflation excludes from the CPI calculation certain food and energy products that tend to have volatile prices.
Meanwhile, Statistics Indonesia (BPS) show that headline inflation, or consumer price index (CPI) growth, dropped to exactly 4 percent, the upper limit of BI’s target range.
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BI said it would increase liquidity stimulus for banks, which could increase loan growth in the country and thereby unlock additional economic activity.
However, the focus of that incentive would be redirected from sectors that were in the post-pandemic recovery phase to sectors that could have a significant economic impact, such as the downstream mineral industries, agriculture and fisheries as well as property, tourism and the green economy.
The central bank warned that the El Niño weather phenomenon may reappear in July and affect the production of rice and horticultural commodities.
Responding to a hawkish Fed
On June 14, the US Fed announced that it would keep interest rates unchanged after 10 straight hikes but signaled that additional hikes could still occur before the end of this year.
“Inflation pressures continue to run high, and the process of getting it back down to 2 percent has a long way to go,” Fed Chairman Jerome Powell said on Wednesday.
BI Governor Perry Warjiyo said the US needed more time to judge the effectiveness of tighter monetary policy in reducing inflation. Thus, BI saw a possibility that the federal funds rate (FFR) would increase to 5.5 percent in July and had used that as the baseline for its decision.
However, Perry also said the current US monetary policy caused the dollar to strengthen against currencies of emerging markets, including Indonesia, which is why BI was focused on keeping the rupiah’s exchange rate stable.
“We focus on the ‘medicine’ that can directly maintain the stability of the rupiah, which is increasing our market intervention effort,” Perry said.
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Economist Faisal Rachman explained that his employer, state-owned Bank Mandiri, maintained its expectation that BI would keep the interest rate unchanged for the rest of the year, especially if the inflation rate remained within the target range.
“The effect of FFR transmission on Indonesia will become more apparent through government bond yields. Should the 10-year government bond yield continue to decline and approach the 6 percent mark, there is no need for BI to increase the interest rate,” Faisal said.
Irman Faiz, a macroeconomic analyst at Bank Danamon, said BI would strive to maintain the policy rate unless the rupiah came under significant pressure.
“It is worth noting that BI still has room to adjust the policy rate should risks related to the rupiah materialize,” Irman stated.