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Fed hike raises pressure on Bank Indonesia: Economists
After Wednesday’s 75-basis-point (bps) interest rate hike by the United States Federal Reserve, economists in Indonesia have called for Bank Indonesia to follow suit so as to safeguard the rupiah’s exchange value.
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Central role: Bank Indonesia’s (BI) logo is pictured on a gate to the central bank’s headquarters in Jakarta on Sept. 2, 2020. (Reuters/Ajeng Dinar Ulfiana)
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fter Wednesday’s 75-basis-point (bps) interest rate hike by the United States Federal Reserve, economists in Indonesia have called for Bank Indonesia (BI) to follow suit so as to safeguard the rupiah’s exchange value.
They agree that BI should raise its benchmark the seven-day reverse repo rate (7DRRR) but differ widely on how large the increase should be.
In a bid to tame the inflation wildfire after consumer prices rose 9.1 percent year-on-year (yoy) in June, Fed chairman Jerome Powell announced that the federal funds rate would rise to the range of 2.25 to 2.5 percent.
“As the stance of monetary policy tightens further, it likely will become appropriate to slow the pace of increases while we assess how our cumulative policy adjustments are affecting the economy and inflation,” Powell said in Washington, DC on Wednesday.
It was the fourth increase in the Fed’s key interest rate this year. Indonesia’s central bank has so far kept its rate unchanged at 3.5 percent.
State-owned Bank Mandiri economist Faisal Rachman said on Thursday that the latest US benchmark interest rate hike “narrowed the room” for BI to maintain its current monetary policy stance.
“The situation has raised the risks to [Indonesia’s] foreign exchange reserves position and thus the [rupiah] exchange rate stability,” Faisal wrote in a note issued by the bank’s Office of Chief Economist. The lender expects BI to hike its 7DRRR by “up to 75 bps” this year while remaining “accommodative in 2022 to support economic growth.”
