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BI implements third 50 bps rate hike to aid rupiah
Bank Indonesia has decided to raise its benchmark rate by another 50-point basis (bps) in a move to bring down domestic inflation and to safeguard rupiah from depreciating even further against US dollar.
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ank Indonesia (BI) has decided to raise its benchmark rate by another 50 basis points (bps) in a move to bring down domestic inflation and to safeguard the rupiah from depreciating even further against the United States dollar.
The rate hike marks the fourth consecutive month of BI’s tighter monetary policy as the central bank brings the benchmark rate to 5.25 percent. Deposit and lending facility rates, meanwhile, also saw another 50 bps rise to 4.5 and 6 percent, respectively.
The central bank’s decision was well above expectations from many analysts and economists. Financial research firm Moody’s Analytics, for instance, forecast only a 25 bps hike.
“The decision to increase interest rates is a front-loaded, pre-emptive and forward-looking measure to reduce overshooting inflation expectations and ensure future core inflation returns to the target range of 3 plus/minus 1 percent in the first half of 2023,” BI Governor Perry Warjiyo told reporters on Thursday.
Read also: BI hikes rate by 50 bps, gap with Fed narrows further
On the other hand, BI expects inflation to continue rising and remain high until the end of this year, albeit lower than the projected consensus. By comparison, BI’s forecast on inflation is less than 5.6 percent, whereas the consensus projects 5.9 percent.
The bank also expects core inflation to keep increasing until the end of this year, reaching 3.5 percent. The increase is expected to continue until the first two months of the first quarter of next year. Nonetheless, thanks to recent measures, BI stated, the hike might be well below what many have expected.
Perry also reiterated that the rate hike was deemed necessary to bring the rupiah’s exchange rate to its “fundamental value” amid the ever-strengthening US dollar driven by heightened uncertainty in the global financial market.
The rupiah had depreciated by more than 8.6 percent year to date (ytd) as of Nov. 16, to Rp 15,610 per US dollar, much deeper than last month’s depreciation of 8.03 percent ytd.
BI noted that central banks in many countries would be likely to retain their tight monetary policy, as they expect the US Federal Reserve to announce more rate hikes until early 2023, putting further pressure on exchange rates and capital flows in many countries, including Indonesia.
Read also: Asian stocks mixed, dollar finds footing as traders assess Fed outlook
Fikri C. Permana, senior economist at Samuel Securities told The Jakarta Post on Thursday that BI’s recent decision could increase the cost of short-term loans and yields on corporate bonds. He said it could also lead to slower credit disbursement growth starting in 2023, as previous hikes start to take effect.
“We can expect economic growth to be less expansive starting in the last quarter this year,” Fikri said.
However, he said the decision was perceived positively by investors in capital markets, which are more concerned over the prolonged rupiah depreciation, as it could be followed by more costly imported goods, which could lead to imported inflation.
BI is expected to keep raising its benchmark rate by another 25 or 50 bps depending on global economic conditions, he said, adding that until the end of this year, BI would still need to catch up with another Fed 50 bps hike.
Faisal Rachman, economist at Bank Mandiri expected BI to continue raising its benchmark rate by another 25 bps until the end of this year and another 25 bps next year to peak at 5.75 percent in the first half 2023.
He explained that although US inflation had eased in October, the Fed kept stressing the need to remain carefully hawkish, causing uncertainty in the global financial market, which could also lead to continuing capital outflows.
Domestically, he expected inflation to keep running at around 5 to 6 percent at least until the first half of next year due to the second-round impact of higher fuel prices.
“BI will likely continue hiking the BI-7DRRR to ensure stability. All in all, as a front-loaded, pre-emptive, and forward-looking measure,” Faisal said in a statement, referring to the bank’s main interest rate.
Febrio Kacaribu, head of the Fiscal Policy Agency at the Finance Ministry told reporters on Thursday that he viewed the BI decision as a conducive sign for the economy.
“BI is performing its function to maintain the rupiah exchange rate. It will be conducive to macroeconomic certainty,” Febrio said.
He added that the government would continue coordinating with the central bank to formulate the best policy outcome for the economy. This includes keeping inflation low, as it is also one of many factors that affect BI’s rate decisions.
