BI Rate Rises to 5.50 Percent, Economist: Increase Only Effective if Supported by Fiscal Policy

Bank Indonesia (BI) decided to raise the benchmark interest rate or BI-Rate by 25 basis points to 5.50 percent. In line with this policy, BI also increased the deposit facility and lending facility interest rates by 25 basis points to 4.50 percent and 6.25 percent, respectively.

Head of Economist at Bank Permata Josua Pardede assessed that the BI's decision to raise interest rates was the right step amid pressure on the rupiah exchange rate to weaken deeper than expected.

According to him, the global condition which is still full of uncertainty and the market's need for a clear policy signal makes this step necessary so that the weakening of the rupiah does not take place without a response.

"The increase in the benchmark interest rate to 5.50 percent strengthens the attractiveness of rupiah assets, helps to contain foreign capital outflows, and reduces pressure on foreign exchange reserves, which have been used for rupiah stabilization," he said in a statement, Tuesday, June 9.

However, Josua emphasized that the increase in interest rates was not necessarily able to restore the strength of the rupiah in a short time.

He added that the weakening of the rupiah at present is not only influenced by the difference in yields with US dollar assets, but is also triggered by a combination of global pressures and domestic concerns.

Josua explained that globally, conflicts in the Middle East, high oil prices, high US interest rates, and investors' tendency to choose safe assets are still burdening the currencies of developing countries. Meanwhile, domestically, the market is still looking at the government's fiscal credibility, the direction of economic policy, the outflow of funds from the stock market, to regulatory certainty.

"Therefore, the increase in the BI Rate is more appropriately seen as a step to dampen short-term pressure, not a single solution to restore the rupiah," he said.

According to him, the effectiveness of this policy will depend on three main factors, namely first, the ability of interest rate hikes to attract foreign funds back to SBN and SRBI instruments.

Second, the effectiveness of coordination between BI and the government in maintaining the liquidity of the money and banking markets so that interest rate tightening does not hinder economic financing.

Furthermore, the third is the government's ability to rebuild market confidence through fiscal discipline, clear policy communication, and consistency in maintaining the investment climate.

"If these three things go well, the rupiah has the opportunity to be more stable. If not, interest rate hikes will only buy time at an increasingly expensive cost," he said.

On the other hand, Josua said this policy also has risks, namely an increase in the BI-Rate has the potential to increase banking fund costs, hold down credit interest rates, and add to the burden of the business world, which is currently facing pressure due to the weakening of the rupiah and high energy prices.

"Therefore, BI needs to maintain balance. On the one hand, BI must be firm enough to maintain the rupiah so that pressure does not spill over into inflation and investor confidence. On the other hand, BI must not make liquidity too tight so that productive credit weakens and economic growth is also held back," he said.

According to him, strengthening the liquidity facilities of banks is important so that the efforts to stabilize the rupiah do not turn into pressure for financing the real sector.

"So, today's increase in the BI Rate is a necessary and appropriate step. BI is sending a message that rupiah stability is a priority," he said.

However, Josua said that for the policy to be effective, monetary measures must be supported by credible fiscal policies, careful debt management, regulatory certainty, and government communication that can increase market confidence.

"The rupiah not only needs attractive interest rates, but also confidence that the direction of Indonesia's economic policy remains consistent, cautious, and friendly to investment," he concluded.