Economist Predicts BI Will Return To Lower Reference Interest Rates This Year

JAKARTA - Bank Mandiri senior economist Reny Eka Putri estimates that the Bank Indonesia (BI) policy interest rate, BI-Rate, can fall back by 25 basis points in 2024.

On Wednesday 18 September, Bank Indonesia announced a reduction in the BI-Rate policy interest rate by 25 basis points (bps) to 6 percent.

"Bank Mandiri's economic research team estimates that the Fed will reduce interest rates further in accordance with the latest dots and BI-Rate can be lowered by 25 more basis points to 5.75 percent this year," Reny said in Jakarta, quoted from Antara, Friday, September 20.

The Fed's dot plot shows the Fed Funds Rate (FFR) will be cut twice again in 2024. The United States (US) or Fed's central bank interest rate is predicted to drop to 4.4 percent in 2024. That suggests the Fed will cut additional interest rates by 50 bps towards the end of this year.

In the future, the market will anticipate a further drop in interest rates from the central bank. The Fed's almost sure opportunity to cut interest rates further has prompted positive sentiment in the domestic market with the return of foreign funding.

According to Reny, the chance of cutting BI-Rate can be re-opened if an increasingly aggressive FFR cut is realized in 2024.

"With the potential to cut interest rates aggressively, we see that the capital flow will return to the domestic market, which will have a positive impact on the Indonesian financial market," he said.

He estimates that the rupiah exchange rate can be closed in the range of Rp. 15,500 per US dollar to Rp. 15,700 per US dollar by the end of 2024.

Reny said that according to estimates, BI and the Fed both lowered interest rates in the September 2024 meeting.

Certainty the direction of the benchmark interest rate will affect the movement of the domestic and global market.

The Board of Governors of Bank Indonesia has cut the BI-Rate by 25 bps to 6 percent in its meeting on 17-18 September 2024.

The decision was supported by well-controlled inflation and strengthening of the rupiah, and comes just hours before the Fed's interest rate decision.

BI sees the uncertainty of global financial markets decreasing and attracting foreign capital flows to enter emerging markets, including Indonesia.

On the other hand, the Fed also cut its benchmark interest rate by 50 bps to around 4.75-5 percent in September 2024, which is the first drop in four years.

Fed chairman Jerome Powell said the decision to relax more aggressively was partly based on the central bank's belief that inflation would soon achieve policymakers' goals of 2 percent per year, as well as to restore the labor market.