JAKARTA - University of Jember economic observer Ciplis Gema Qori'ah expects Bank Indonesia (BI) to maintain low interest rates so as not to pose a risk of instability if the domestic economy does not fully recover.
"The global economy is currently showing symptoms that are increasingly unstable and this phenomenon is marked by a general spike in price increases (inflation)," he said in a written statement, quoted from Antara, Thursday, June 30.
According to him, these global conditions have prompted Central Banks in various parts of the world to implement a policy of tightening monetary policy through increasing interest rates, including India, the Philippines, India and South Korea.
In the United States, he continued, the US Central Bank (The Fed) has raised interest rates for the first time since 2018, in March 2022 and the plan is to gradually increase interest rates to keep the economy from rising inflation.
However, interest rates in Indonesia from February 2021 to May 2022 have not changed, which are in the range of 3.50 percent and monetary policy in Indonesia appears to be neutral as implemented by Japan, Germany, China and Thailand.
"The impact of this policy will certainly reap various criticisms because an increase in the Fed's interest rate could risk causing capital outflows and threaten the stability of the rupiah exchange rate," he said.
However, he assessed that these risks can be anticipated with economic growth rates that are far from pro-growth conditions, controlled domestic inflation and well-maintained external sector resilience in Indonesia.
Theoretically, he continued, monetary policy can have an impact on economic activity through various transmission channels that focus on the demand side and get more attention and the audience forgets the existence of supply side transmission channels.
This supply-side transmission channel is known as the cost-side channel, where interest rates affect the company's marginal cost of production and pricing behavior, so that tightening interest rates can actually make the price level rise because it encourages companies to mark-up prices.
"When the supply side monetary policy transmission channel is more dominant than the demand side, monetary policy by raising interest rates can actually backfire," he said.
Ciplis explained that inflation that occurred in Indonesia was caused by pressure from the supply chain side as the price of raw materials for almost all types of goods experienced obstacles, so that production costs increased and prompted companies to increase the prices of manufactured goods.
In addition, bank lending rates are also still difficult to come down, so the cost of funds is still relatively high in Indonesia.
"Thus, Bank Indonesia is very careful in raising interest rates because it can pose a risk of instability if the domestic economy does not fully recover," he said.
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