BI Potentially Holds Interest Rates At 6 Percent

Bank Indonesia (Photo: Antara)

JAKARTA - Bank Indonesia (BI) will hold a Board of Governors Meeting (RDG) from April 23 to April 24, 2024 and one of the concerns is the benchmark interest rate.

Head of Bank Permata economist Josua Pardede said that at the BI RDG in April 2024, BI would tend to still maintain BI-rate at the level of 6 percent.

According to Josua, the current weakening of the Rupiah is due to the solid data on the United States economic indicators so that the Fed policy interest rate cutting space shifts from June 2024 to September 2024.

In addition, Josua added that the weakening of the Rupiah was also due to seasonal factors where dividend payments and coupons to non-residents as well as principal external debt payments would increase and peak every second quarter of each year.

"To contain further weakening of the Rupiah, BI actually still has quite a lot of ammunition/strongly supported by foreign exchange reserves which are still relatively high so that BI can still enter and intervene in foreign exchange markets," he explained in his statement, Tuesday, April 23.

Nevertheless, Josua said that the uncertainty in the global financial market is still relatively high and can change drastically rapidly so that geopolitical conditions in the Middle East and the anticipation of releasing some data in the US are very important until the RDG on April 23-24, 2024.

According to Josua, if global conditions remain unfavorable and even tend to worsen, and demand for safe haven assets continues to increase so that prolonged risk-off sentiment leads to a continuous weakening of the Rupiah exchange rate even though BI has intervened, then there is indeed room for BI to increase BI-rate.

"We see an increase in BI-rate as BI's last option to maintain the stability of the Rupiah exchange rate," he said.

Josua conveyed that the decision of Bank Indonesia (BI) to increase the effectiveness of triple intervention policies such as interventions carried out by BI on the DNDF market, spot market, and SBN has actually produced results amidst the onslaught of risk-off sentiment that has recently been going on.

In addition, Josua sees that the current weakening of the Rupiah tends to be increasingly limited and foreign exchange reserves that are relatively high are also quite strong capital for BI.

According to Josua, the re-enactment of the DHE policy has indeed become very necessary, considering that the trade surplus in March 2024, which rose again to 4 billion US dollars or the highest since February 2023, has not been felt by its impact on Indonesia's foreign exchange market.

"This means that not all surpluses have entered Indonesia's financial system. We see re-enactment of the DHE policy as an option that can be used before raising the BI-rate interest rate," he explained.

According to Josua, DHE's policy can be widened not only for Indonesia's main export commodities, most of which are commodities, into all products.

Josua conveyed that the current weakening of the Rupiah was indeed due to external factors, namely the increasing risk of a higher for longer, triggering risk-off sentiment.

However, according to Josua, there are also internal factors where foreign exchange requests tend to increase seasonally every second quarter to make principal debt payments, dividends, and coupons to non-residents.

"Of course, the monetary instrument of intervention in foreign exchange markets is one of the most effective ways in an effort to stabilize the Rupiah exchange rate," he said.

Josua said that if the BI-rate was raised, the positive impact would be that the pressure from these external factors could be eased due to positive spread widening with other state financial instruments yields, so that Indonesia's financial instruments tend to be more attractive (the existence of compensation for the increase in premium risk).

Meanwhile, according to Josua, the negative impact is that the burden of domestic financial instruments will increase and become a burden for issuers.

"In addition, the increase in BI-rate can be transmitted to an increase in credit interest rates, thereby increasing the borrowing cost which leads to the delay in Indonesia's potential economic growth," he concluded.