Indef: BI Must Immediately Cut The Reference Interest Rate

JAKARTA - The Institute for Development of Economics and Finance (Indef) assesses that Bank Indonesia (BI) needs to immediately cut the benchmark interest rate or BI-Rate.

The reason is, BI's benchmark interest rate is currently at a high level, which is 6.25 percent. In fact, economic conditions are starting to show better movement.

"Because our interest rates are high and global signs that are feared by the Government and BI will subside, we need a reduction in interest rates at this time," said Big Data Development Director Indef Eko Listiyanto in an Indef virtual discussion, quoted from Antara, Thursday, September 12.

Indef's encouragement for the Government to lower interest rates was mainly influenced by three urgencys.

First, the real sector needs a monetary relaxation signal to start expanding.

According to Eko, the Government's optimism that the economy will improve in the future needs to be proven by a signal that can provide certainty. For the real sector, the signal can be in the form of a monetary relaxation policy by BI.

"Pro-growth is carried out through macroprudential policies, but for me it is not enough. It needs more clarity regarding the signal of monetary relaxation," he added.

The next urgency is to inhibit signs of slowing economic growth. Based on Indef's projection, there is a possibility of economic growth in the third quarter of 2024 dropping below the 5 percent level, as there has been a slowdown from the first quarter of 5.1 percent and then continuing to 5.05 percent in the next quarter.

"We are worried about that, but don't let this happen. One thing that can revive the economy is the monetary signal," said Eko.

The last urgency is to welcome a leadership transition with economic optimism. Usually, said Eko, the early days of the transition to government were intensified with various positive economic performances. However, without the right steps, this positive performance has the potential to only take place briefly and reduce optimism from market participants.

Meanwhile, a number of economic conditions are giving positive signals. For example, inflation in the United States (US) tends to decline so as to widen the opportunity to lower the Fed interest rate or Fed Fund Rate (FFR).

Then, geopolitical tensions are somewhat more gentle. although a number of conflict issues are still happening, the trend is to show a easing situation. This condition opens up momentum to drive the real sector.

From the domestic side, the rupiah exchange rate against the US dollar has strengthened several times, offset by the position of foreign exchange reserves which increased to 150.2 billion US dollars as of August.

"With the latest developments, we must welcome them. Don't wait too long," he said.

In the Announcement of the results of the BI Board of Governors Meeting in August 2024, BI Governor Perry Warjiyo said BI's decision to maintain the benchmark interest rate or BI-Rate was 6.25 percent as a pre-emptive and forward looking step to keep inflation within the target of 2.5 percent plus minus 1 percent in 2024 and 2025.

The decision remains consistent with the focus of pro-stability monetary policy, namely to further strengthen the stabilization of the rupiah exchange rate.