Economists Say Bank Indonesia Still Has Room To Raise Interest Rates By 25 Bps

JAKARTA - Economic observer from the University of Indonesia (UI) Fithra Faisal said that Bank Indonesia (BI) still has the potential to raise its benchmark interest rate by 25 basis points (bps) this year.

According to him, even though it has raised 225 bps since August 2022, it is considered that the central bank still has room to increase the current interest rate which is 5.75 percent.

"I think there is still a possibility of an increase of 25 bps at the earliest in the first half of 2023," he told VOI, quoted Thursday, February 9.

Fithra explained that there were a number of assumptions underlying his statement. First, the level set now does not reflect BI's average interest rate so far, which is around 6 percent.

Second, the signal from the United States central bank The Federal Reserve (The Fed) that it will continue to increase interest rates in the 2023 period.

“The Fed will still raise interest rates because their inflation reduction target has not been achieved. At least one or two more times the Fed will change its interest rates, although not as high as last year," he said.

Three, Bank Indonesia's efforts to keep the rupiah exchange rate from experiencing excess when the dollar price is higher due to the soaring fed funds rate.

"Therefore, the response from BI should be to raise interest rates because otherwise there will be pressure on the rupiah and our bond market," said Fithra.

As previously reported by VOI, the Governor of Bank Indonesia Perry Warjiyo said that the current benchmark interest rate is sufficient to achieve the 2023 inflation target.

"At the last Board of Governors' Meeting (RDG) it was clear that 225 basis points was sufficient. This is very clear, there are no words that are more transparent (besides adequate) with policy direction, the forward guidance is clear," said Perry.