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BI Rate rise increases stability while maintaining growth
While the central bank's recent decision to raise the BI Rate by 25 basis points to 6.25 percent may not have been popular, it was the appropriate measure to respond to the current global turmoil and to anchor future inflation.
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No small change: Tellers serve customers on April 17, 2024 at a money changer in Jakarta as the United States dollar hit a new high of Rp 16,250. (Antara/Sulthony Hasanuddin)
T
he Bank Indonesia (BI) Board of Governors Meeting on April 23-24 decided to raise the benchmark interest rate (BI Rate) by 25 basis points to 6.25 percent, breaking through the 6 percent rate that had been maintained for six months since October 2023 to reach the highest level since April 2015.
Raising the central bank's benchmark interest rate was not a popular decision, but the monetary measure was an appropriate action for two reasons.
First, it was made in response to a global turmoil that has turned out to be increasingly uncertain, from the United States Federal Reserve’s delay in accelerating the reduction of its benchmark interest rate in line with US inflation, which is still above the targeted 2 percent (higher for longer), and to geopolitical factors such as Russia's unending war on Ukraine, which has been exacerbated by the escalation of war between Israel and Gaza in the Middle East to involve Iran.
As is always the case, an emergence of global turmoil will move funds from emerging countries to safe haven assets, especially US dollars (flight to quality).
Big and institutional portfolio investors are worried about their funds. As a result, the US dollar exchange rate has predictably strengthened against many other countries' currencies, including the rupiah, which even exceeded Rp 16,000 per US dollar last week.
The second reason is to anchor future inflation within BI's corridor of 2.5 plus/minus 1 percent in 2024 and 2025. There appears to be stronger inflationary pressure in the future, especially from food inflation, which will cause inflation to continue rising this year.
The policy to raise the benchmark interest rate shows that BI remains consistent with its pro-stability policy in navigating the economy.
