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Steady monetary policy environment provides opportunity to build resilience
A long track record of prudent fiscal and monetary policies and steady growth has helped to shield the economy from shocks.
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The Welcome Monument, a popular landmark in Central Jakarta, is seen in this aerial picture taken on Sept. 14, 2024. The statue is located on a traffic circle near the historic Hotel Indonesia. (AFP/Bay Ismoyo)
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ndonesia’s economy has successfully navigated the global inflationary cycle and economic volatility has dampened. A long track record of prudent fiscal and monetary policies and steady growth has helped to shield the economy from shocks.
Domestically, growth has held steady despite tighter monetary and fiscal policies, while inflation has declined steadily into the central bank’s target range of 1.5 to 3.5 percent. Rupiah exchange rate dynamics are favorable with the currency appreciating about 6 percent against the United States dollar over the past two months. The external environment is supportive.
Global risks of a “hard landing” have eased. In a hard landing scenario, the economy contracts sharply, often following policy tightening. Given labor markets and domestic demand globally have been resilient, the hard landing scenario is less likely. The US Federal Reserve’s interest rate cut at its September meeting started the move toward lower US interest rates.
These factors mean Bank Indonesia now has leeway to head down a glide path to lower interest rates following nearly two years of an interest rate upcycle. The central bank cut interest rates at its recent September meeting. Still, policymakers will want to keep domestic interest rates attractive for capital inflows, and will thus move cautiously while cutting rates.
This does not ensure only smooth sailing. Recent global market jitters in late August and early Septembers are reminders that financial volatility risks are still present in the background. If some of these risks materialize, we cannot rule out a sudden change in the global interest and exchange rate environment. Nevertheless, a more relaxed monetary policy environment is an opportunity to build on past success and shore up resilience for the future. The economy can build further resilience in the space of both interest and exchange rates.
Benefiting from interest rates
Inflation-adjusted interest rates, or “real” interest rates, are relatively high in Indonesia. As a quick comparison, the short-term interest rate adjusted for inflation is currently trending at about 2.4 percent in Indonesia compared with about -0.4 percent on average in other major Southeast Asian economies.
