Those Who Have Debt Get Ready, Interest Rates Are Believed To Rise Again Tomorrow

JAKARTA – The trend of rising interest rates is believed to continue in the second semester of 2022. This was conveyed by the Chief Economist of Bahana TCW, Budi Hikmat.

According to him, Bank Indonesia (BI) will again take aggressive steps after the Board of Governors' Meeting on September 21-22 by setting a new interest rate. The projection is based on the central bank's stance in August which raised the benchmark interest rate by 25 basis points (bps) to 3.75 percent.

“Observing the impact of rising fuel oil on inflation and accelerating lending, Bahana TCW Investment Management (Bahana TCW) understands that Bank Indonesia will again raise the BI 7-Day Reverse Repo Rate (BI7DRR) by 25 bps to 4.0 percent", he said in a press statement quoted on Wednesday, September 21.

According to Budi, the economic recovery is characterized by the acceleration of bank lending, which has returned to the double-digit level. He noted, the annual rate of credit disbursement as of July 2022, reached 10.5 percent in July 2022, which is close to pre-pandemic growth which was in the range of 12-13 percent.

Budi added that the current rate of credit distribution seems to have contributed to core inflation which in August 2022 touched 3.04 percent.

"To provide direction so that core inflation is under control next year, BI has a reason to start normalizing interest rates but still supports economic recovery", he said.

In addition to the internal considerations above, an increase in interest rates is needed to maintain a competitive interest rate differential (the difference between BI's interest rates against other countries). He said, almost all countries have raised interest rates except for some countries that are facing the challenge of an economic slowdown such as China, Turkey and Russia.

“It can be said that Bank Indonesia is one of the central banks that have raised interest rates more recently than central banks in other countries. However, BI's steps need to be appreciated. In addition to avoiding behind the curve, normalization of interest rates is also aimed at maintaining the attractiveness of domestic assets in foreign currencies and avoiding outflows in the market", he explained.

Meanwhile, the timing of the interest rate hike in the middle of this week is considered quite appropriate because at the same time the Fed is also expected to raise interest rates by 75 to 100 bps.

"We estimate that Bank Indonesia will raise interest rates by 50 bps until the end of the 2022 period", said Budi.

For information, the BI rate is the main reference for business actors in setting interest rates, such as savings, deposits, and credit and financing. Thus, if the BI benchmark interest rate rises, it is certain that the customer burden will also increase.