In light of a robust economy and “high” inflation expectations, the Bank of Indonesia said on Thursday that it would act more firmly. As a result, the bank has increased the benchmark interest rate for the third consecutive month.
A Global Economic Slowdown
Bank of Indonesia was expected to increase the 7-day reverse repo rate to 5.25 percent. This was the consensus among Reuters experts, and it happened. There was also a similar addition to all of its other insurance rates.
During an online news conference, Governor Perry Warjiyo made certain statements. According to Warjiyo, making the “front-loaded” and “pre-emptive” action was necessary to maintain the rupiah and sustain inflation expectations. He said the international economy was slowing down, even if Southeast Asia’s biggest economy was improving.
Additionally, certain countries may experience a recession. The central bank’s forecast of 4.5% to 5.3% growth in 2022 has remained the same. The GDP for the next year will likewise be “high,” it was noted.
According to Warjiyo, Bank Indonesia would intensify its monetary policy to reduce the excessively high inflation expectations that are now in place. He continued by saying that BI’s rate increases were less “aggressive” and more “measured” than those implemented in certain other nations.
BI has increased interest rates by 175 basis points (bps) since August. During the most recent tightening cycle, they will return to where they were in 2018. The verdict mostly had little effect on the rupiah’s value. However, the Dollar-Euro exchange rate has recently decreased by almost 9% due to the Federal Reserve’s tightening monetary policy.
For the sixth consecutive month, Indonesia’s inflation rate exceeded the Bank of Indonesia’s target range of 2-4%. Despite October’s decline to 5.71 percent, this is the case. At 5.95 percent in September, it was close to a seven-year high.
Inflation Cloud Reach 3.7% In the First Quarter Of 2023
The forecasted market inflation rate of 5.9% for 2022 is deemed “extremely high” by Warjiyo. This was in contrast to the 5.6% updated prediction made by BI. Warjiyo projected that in the first quarter of 2023, core inflation would reach 3.7%.
Due to growing food prices worldwide, Indonesia’s already-pressured inflation has worsened. In addition, prices have increased after the government subsidized gasoline prices by nearly 30% in September.
At Capital Economics, Gareth Leather holds the position of senior economist. Given recent economic growth, Leather anticipates that the BI will increase rates soon. According to Leather, more rises of 75 basis points are anticipated in the following months.
Until the central bank stops tightening in early 2023, he said, this will go on. The central bank has now chosen to increase interest rates. This comes after figures showed that Indonesia’s GDP increased by 5.72 percent year over year in the third quarter. In more than a year, this was the fastest pace.
The foundations of Indonesia’s economy remain sound, according to Warjiyo. In 2022, the country will have a current account surplus, which indicates robust growth. By the end of the first quarter of 2023, according to Warjiyo’s projection, the Federal Reserve will have completed its tightening monetary policy cycle. As a result, he believes the rupiah is at a “turning point” and it will appreciate.