LPEM UI Projects Bank Indonesia to Maintain Interest Rates This Month

Illustration. (Photo: Doc. Antara)

JAKARTA - The University of Indonesia's Institute for Economic and Community Research (LPEM UI) projects that Bank Indonesia (BI) will maintain its benchmark interest rate or BI-Rate at 6 percent at the BI Board of Governors Meeting in October 2024.

"Bank Indonesia is expected to maintain the BI rate at 6.00 percent at the October meeting. Any potential room for further policy cuts must be reserved to address the risk of a prolonged deflationary trend," said LPEM UI Researcher Jahen Fachrul Rezky in his statement in Jakarta, quoted from Antara, Wednesday, October 16.

However, with less than three months left in 2024, BI still has room for further interest rate cuts in the remainder of this year.

This is considering that the interest rate cut instrument can be used in the future to boost aggregate demand in the real sector if the deflationary trend continues.

"However, BI's benchmark interest rate cut tends not to be urgent to be carried out at the BI Board of Governors Meeting this October. Therefore, we are of the view that BI needs to maintain its benchmark interest rate at 6.00 percent for now," he said.

In its analysis report, LPEM UI stated that from the domestic side, Indonesia is currently still struggling with a consecutive deflation trend for the past five months, although in general, it is still within BI's target range of 1.5 percent to 3.5 percent.

It is known that every month, the general price index experienced deflation of 0.12 percent (mtm) in September 2024, deeper than August which was 0.03 percent (mtm).

Similar to the annual price trend, the main driver of monthly deflation in September was the food, beverage, and tobacco group, which recorded a deflation of 0.59 percent (mtm) and contributed 0.17 percentage points to the overall deflation this month.

However, the demand side also has its own role in deflation. Core inflation recorded a decline for the third time in the past six months, which signals a decrease in pressure from the demand side and weakening consumer purchasing power.

"Although the impact on the demand side may not be as large as the impact on the supply side, it still contributes to weakening inflation and cannot be ignored," wrote the LPEM UI Macroeconomic Analysis Report Series.

Then in general, annual inflation was recorded to have fallen to 1.84 percent (yoy) in September 2024, down from 2.12 percent in August 2024.

Meanwhile, another consideration that is the basis for BI to maintain interest rates this month is the rupiah exchange rate which is considered stable.

The latest developments show that the rupiah is stable at around Rp15,660 per US dollar despite depreciating amid capital outflows influenced by geopolitical tensions and uncertainty surrounding the general election in the United States (US).

In terms of trade, Indonesia's trade balance recorded a surplus of 3.26 billion US dollars in September 2024. This achievement indicates a sharper decline in imports compared to exports.

Furthermore, the LPEM UI analysis report explains that the world is currently entering an era of easing along with the US central bank's interest rate cut or the Fed for the first time in the last 4.5 years. However, the Fed's interest rate cut of 50 basis points last September was greater than analysts' estimates.

With its mandate to maintain inflation at an average of 2 percent (yoy) in the long term, the Fed's interest rate cut is considered a drastic step considering that the US inflation rate was still 2.4 percent (yoy) in September, higher than the economist consensus of 2.3 percent (yoy).

"Increasing global geopolitical tensions, China's stimulus program, and the US Election are still factors influencing the flow of foreign capital to Indonesia and fluctuations in the rupiah exchange rate soon," the report wrote.