BI Rate Needs To Be Detained To Maintain Inflation Even Though Rupiah Is Stable

JAKARTA - Bank Indonesia (BI) still needs to hold the benchmark interest rate or BI Rate at 6 percent. This is because the rupiah tends to be stable in the last few weeks after it was depreciated, and domestic inflation is still within the BI target range.

"The current condition of inflation and the exchange rate is considered to justify that there is no urgent need for BI to change its benchmark interest rate. Therefore, we are of the view that BI needs to hold its benchmark interest rate at 6 percent at the Board of Governors Meeting this March," said Economist of the Institute for Economic and Community Research, Faculty of Economics and Business, University of Indonesia (LPEM FEB UI) Teuku Riefky quoting Antara.

Bank Indonesia targets inflation to remain under control within the target of 2.5 plus minus one percent by 2024.

The impact of the increase in food prices is most seen in the volatile price component. In February 2024, volatile price group inflation was recorded at 8.47 percent year on year (yoy), a drastic increase from 7.22 percent (yoy) in the previous month and reached its highest point since October 2022.

Riefky said monthly inflation of volatile price groups increased from 0.01 percent month to month (mtm) in January 2024 to 1.53 percent (mtm) the following month.

The escalation of the volatile price group was driven by the rising prices of various commodities. In February 2024, various commodities experienced price increases, such as rice prices increasing by 17.53 percent (yoy), garlic prices by 33.40 percent (yoy), and red chili prices by 47.37 percent (yoy).

On the other hand, the pressure on the rupiah has been quite significant in recent weeks due to an increase in global financial uncertainty following the timing of the decline in interest rates by various global central banks, especially the central bank of the United States (US) or the Fed.

As of March 17, 2024, the rupiah has been depreciated at 1.6 percent year to date (ytd), and tends to perform worse than some peer countries such as Indian Rupees, Philippine Peso, and Chinese Yuan.

However, the current foreign exchange reserves are relatively high and have the capacity to absorb pressure from potential shocks in the capital market and exchange rates. Indonesia's foreign exchange reserves in February 2024 were recorded at 144.04 billion US dollars.

Currently, Indonesia's foreign exchange reserves rate is equivalent to 6.5 months of imports or 6.3 months of imports and government foreign debt payments, and is above the international adequacy standard of about three months of imports.