INDEF: Rising Reference Interest Rates Is The Safest Policy

JAKARTA - Executive Director of the Institute for Development of Economics and Finance (INDEF) Esther Sri Astuti assessed that the decision of Bank Indonesia (BI) to raise its benchmark interest rate to 6.25 percent was the safest policy choice.

"Bank Indonesia does not have many other monetary instruments to control the rupiah exchange rate which continues to be appreciated so that the safest thing is to increase interest rates," said Esther Sri Astuti, quoted from Antara, Wednesday, April 24.

In addition to reducing the depreciation of the rupiah exchange rate, he stated that the policy also aims to prevent capital flow from leaving Indonesia.

Even so, he highlighted the side effects of Indonesia's central bank decision on the real sector.

Esther said that the increase in interest rates has the potential to burden business actors who have loans in banks so that it is possible to cause non-performing loans (NPL).

According to him, this could have an impact on slowing down the growth of the real sector. BI should also prepare a strategy to anticipate the situation.

"There is a possibility that there will be an NPL, so BI must also provide credit relaxation if there are debtors who object and have bad credit tendencies," he said.

BI on Wednesday officially announced an increase in the BI benchmark interest rate by 25 basis points (bps) to 6.25 percent and raised the deposit facility interest rate by 25 basis points to 5.5 percent and the lending facility interest rate by 25 basis points to 7 percent.

"This increase in interest rates is to strengthen the stability of the rupiah exchange rate from the possibility of worsening global risks as well as pre-emptive and forward looking steps to ensure inflation remains on target," said BI Governor Perry Warjiyo in Jakarta, Wednesday.

He also said that so far the NPL ratio is still relatively low, at 2.35 percent (gross) and 0.82 percent (neto).