Indef: High Interest Rates Accompanied By Inflation Can Slow Economic Growth

Illustration. (Photo: Doc. Antara)

JAKARTA - Head of the Center of Macroeconomics and Finance Institute for Development of Economics and Finance (Indef) M Rizal Taufikurahman stated that the high rate of benchmark interest rates accompanied by low inflation has the potential to slow economic growth.

This is because the benchmark interest rate of Bank Indonesia or BI is a high rate accompanied by low inflation as is currently happening, each recorded at 6 percent and 1.57 percent year-on-year (yoy) in December 2024, can create a high real interest rate.

"The high real interest rate tends to increase the cost of real loans that can suppress investment and consumption, as well as slow economic growth," said M Rizal Taufikurahman, quoted by Antara, Monday, January 6.

He said that the high BI rate tends to increase bank loan interest rates, thus limiting public access to financing which then reduces purchasing power, domestic consumption, and investment capacity.

This condition, he continued, caused a low pressure on demand in the economy in the community, thereby suppressing the inflation rate.

Nevertheless, Rizal said that a low and stable level of inflation could also provide space for Bank Indonesia to adjust its monetary policy to encourage economic growth.

Bank Indonesia has also expressed its commitment to maintain the stability of the rupiah exchange rate and ensure inflation remains within the target, while continuing to pay close attention to the dynamics of developing conditions.

"It is projected that in the future, if inflation remains under control, there will be an opportunity for Bank Indonesia to lower the benchmark interest rate to encourage higher economic growth," he said.

The Central Statistics Agency (BPS) recorded an increase in the Consumer Price Index (IHK) in December 2024 by 0.44 percent month-to-month (mtm), bringing IHK 2024's annual inflation to 1.57 percent yoy. This figure is still in the range of the government's target of 2.5 percent plus minus 1 percent.

Meanwhile, the Meeting of the Board of Governors (RDG) of Bank Indonesia (BI) on 17-18 December 2024 decided to keep the BI rate at the level of 6 percent.