Economists Estimates Reference Interest Rate Of 6.25 Percent Will Last Until The End Of The Year

Photo: Aris Nurjani/VOI

JAKARTA - Chief Economist of PermataBank and Head of Permata Institute for Economic Research (PIER) Josua Pardede estimates that the benchmark interest rate of Bank Indonesia or BI-Rate at the level of 6.25 percent will last until the end of 2024.

"We are relatively conservative biased, meaning that we see that there is a potential for a decrease in the Fed Funds Rate by around 25 basis points (at the end of 2024), but we estimate that BI will remain in the range of 6.25 percent, so we estimate that the rupiah exchange rate will at least still be in the range of Rp. 16 thousand," Josua said in "Indonesia Economic Review 1Q2024" in Jakarta, quoted from Antara, Wednesday, May 15.

Josua assessed that BI's policy to increase the benchmark interest rate was a pre-emptive step in order to maintain the stability of the rupiah exchange rate and increase inflation expectations, especially to manage imported inflation.

He reminded that strengthening the US dollar tends to encourage the risk of imported inflation. To reduce imported inflation, the increase in BI interest rates is considered the right step.

"But is this (increased by BI-Rate) a negative impact on economic growth? Not really. We see that BI's policies are not only limited to monetary policy. If we look at other BI policies, such as macroprudential, payment systems, financial market funding, this is still relatively loose, especially with the policy of macroprudential liquidity incentives (KLM) which will still be relaxed or continued," he said.

Josua said that the direction of major central bank interest rates in the world, including Indonesia, tends to be influenced by the direction of the Fed or the US Central Bank. The Fed is expected to only lower the benchmark interest rate by around 25 bps by the end of 2024 and will be more aggressive next year, in line with US inflation expectations that will begin to approach the target.

"We see that with global geopolitical tension conditions that are still quite dominant and there is still uncertainty related to how much the Fed's interest rate decreases, monetary policy (by BI) will certainly be taken carefully," he added.

Then regarding the impact of the BI-Rate increase on bank interest rates, Josua assessed that the impact tends to be more limited. When viewed from the liquidity side through several indicators, such as the ratio of liquid assets to non-core deposits (AL/NCD) as well as the ratio of liquid assets to third party funds (AL/DPK), this is still above the threshold and there is no indication of a significant trend.

"We also see that the condition of resilience in terms of bank credit distribution, which is still growing double digits this year, is still simple with the liquidity of banks and support for macroprudential policies to banks so that bank credit distribution will still be solid. In addition, even though the OJK policy related to COVID-19 has been completed, we see that NPL will still be maintained," said Josua.