Rupiah Strengthened, BI is Expected Not to Raise BI Rate Again

Rupiah and US dollar (between)

JAKARTA - Bank Permata Chief Economist Josua Pardede assessed that the opportunity for Bank Indonesia (BI) to raise the BI Rate again at tomorrow's meeting is getting smaller as the rupiah exchange rate improves.

According to him, the most likely scenario is that BI will maintain the benchmark interest rate at the level of 5.50 percent, considering that the central bank has raised interest rates aggressively by 75 basis points in less than a month.

"The 50 bps increase in May and 25 bps in the June 9 weekly RDG are strong enough as a signal that BI is serious about maintaining rupiah stability," he explained in his statement, quoted Thursday, June 18.

He added that the strengthening of the rupiah was one of the main factors that reduced the need for further interest rate hikes.

According to him, the previous tightening measures aimed to hold back the weakening of the rupiah, withdraw foreign capital flows, and maintain inflation expectations.

Josua said that with the rupiah's condition starting to stabilize, the price of oil declining, and foreign funds returning to rupiah-based instruments, the urgency to raise interest rates again is lower.

"In this situation, BI is likely to prefer waiting for the impact of the previous increase to work first," he said.

However, Josua said the direction of BI policy was still influenced by global developments, especially the US monetary policy, if The Fed gave a signal that interest rates would stay high for longer or even potentially rise again, pressure on the rupiah could increase.

According to him, in this condition, BI can still maintain a firm stance without having to immediately raise interest rates, among others, through instruments such as SRBI, measured foreign exchange market interventions, increased returns on monetary instruments, and the provision of hedging incentives to maintain the attractiveness of rupiah assets.

"So, I see BI's chances of holding interest rates higher, around 80-90 percent. The possibility of another 25 bps increase still exists, but more as a risk scenario if the rupiah returns to around Rp18,000 per US dollar, oil prices rise again, the yield on US debt increases, or the market reads the Fed's statement very strictly," he said.

"In other words, further hikes are not the main scenario, but remain a guard option if market pressures worsen again," he added.

In addition, Josua said BI also needs to take into account the economic impact of additional interest rate hikes, because tightening too quickly has the potential to increase banking fund costs, hold back credit interest rates, slow consumption and investment, and increase the cost of issuing Government Securities (SBN).

"In an economic condition that still needs growth support, additional interest rate hikes should only be used if the stability of the rupiah is again seriously threatened," he said.

According to him, considering these various factors, the most appropriate strategy for BI is to maintain the BI Rate at the level of 5.50 percent while still conveying a firm policy message.

Josua said BI needed to emphasize that rupiah stabilization remained a priority, inflation would be maintained according to the target, and further steps would be taken if external risks increased again.

"In this way, BI continues to maintain market confidence without directly adding burden to the real sector," he said.