Bank Mandiri Economist: Rising BI Rate Can Pull Capital Flows Entering Amid Global Uncertainty

JAKARTA - Economist Andry Asmoro assessed that the increase in the benchmark interest rate of Bank Indonesia (BI) or BI-rate to 6.25 percent could attract capital inflows amidst global uncertainty, which ultimately had an impact on financial sector stability.

"BI's policy will support financial stability and attract incoming capital amid global uncertainty," Asmoro said in Jakarta, quoted from Antara, Thursday, April 25.

According to Bank Mandiri economist, weakening the global economy and increasing geopolitical tension will encourage market participants to place their funds on instruments that are considered safe (safe haven), such as US dollars and gold commodities.

The movement of the dollar index (DXY) is still increasing, to the level of 105-106 from the previous 101 at the end of 2023. The increase shows the continued strengthening of the US dollar against the exchange rate of a number of major currencies.

However, along with the increase in BI interest rates, investors are expected to divert their funds from the US dollar to the Indonesian market.

Moreover, Asmo estimates that the Fed will still maintain interest rates at a high level of 5.50 percent over the next one to three months. The Fed is projected to only lower interest rates by 25 basis points (bps) to 50 bps in September with a probability of 46.2 percent.

"We see the possibility of a very small BI-rate movement, so the BI-rate is expected to be maintained at the level of 6.25 percent by the end of 2024," said Asmo.

Meanwhile, Indonesia's inflation rate is estimated to last in the range of 2.5:1 percent in 2024 if the government continues to strive to manage food and energy prices.

In the future, the increase in BI-rate, triple optimization of interventions, and BI policies that are pro-market through the issuance of new instruments are expected to attract foreign flow of funds, increase foreign exchange reserves, and reduce external pressure on further rupiah depreciation. In the short term, financial market volatility will be higher," said Asmo.

BI has decided to raise the benchmark interest rate by 25 bps with the aim of strengthening exchange rate stability and preventing economic growth from the impact of global rambutan.

Through the BI Board of Governors Meeting (RDG) on April 23-24, 2024, BI also decided to increase the deposit facility interest rate by 25 bps to 5.5 percent, and the lending facility rate by 25 bps to 7 percent.

In addition, the decision is also to ensure that inflation remains in the target of 2.5 to 1 percent by 2024 and 2025 in line with the pro-stability monetary policy stance.