Raising Interest Rates To 3.75 Percent, BI 'Steals Start' Controlling Inflation Before Government Changes Fuel Prices

Illustration (Photo: Doc. Antara)

JAKARTA - Bank Indonesia (BI) today decided to raise the benchmark interest rate by 25 basis points (bps) from 3.50 percent previously to 3.75 percent. The policy to raise the BI rate is the first time during the pandemic after imposing the lowest interest rate in history in the last two years.

In his explanation, BI Governor Perry Warjiyo said that this step was based on efforts to control the inflation rate, which has been rising consistently since the beginning of 2022.

"This is intended as a preventive measure and to mitigate the risk of an increase in core inflation and inflation expectations due to the increase in non-subsidized fuel prices," he told reporters via virtual media on Tuesday, August 23.

According to Perry, the central bank has estimated the inflation rate by referring to current conditions. He said core inflation, which is BI's main reference, will shoot up to 4.15 percent by the end of the year.

Likewise, inflation based on the consumer price index (CPI) is believed to have skyrocketed to above 5 percent.

In a VOI note, Bank Indonesia previously estimated that core inflation would be at 2.9 percent and CPI inflation of 3 percent plus minus 1 percent for the whole of 2022.

"Core inflation and inflation expectations are estimated to be at risk of increasing due to rising prices for non-subsidized fuel oil (BBM) and volatile food inflation, as well as increasing inflationary pressure from the demand side," he said.

"These various developments are expected to push inflation in 2022 and 2023 at risk of exceeding the target upper limit of 3 percent plus minus 1 percent and therefore a stronger policy synergy is needed between the central and regional governments with Bank Indonesia for control measures," said the BI Governor. Perry Warjiyo.