Flashback Monetary Policy 2022: Era Of Low Interest Parts Ends, Time To Waiting For A Reduction Inflation

Bank Indonesia. (Photo: Doc. Antara)

JAKARTA - It is already the lowest interest rate honeymoon period in the history of 3.5 percent set by Bank Indonesia. The turning point occurred in August 2022 when the central bank decided to increase the BI-7 Day Reverse Repo Rate (BI7DRR) by 25 basis points (bps) to 3.75 percent.

At that time, BI Governor Perry Warjiyo said that this step was based on efforts to control the inflation rate which had consistently increased since early 2022.

"This is intended as a preventive measure and mitigates the risk of increasing core inflation and inflation expectations due to rising non-subsidized fuel oil (BBM) prices," he said.

A month later the same thing happened. In fact, Bank Indonesia is getting more aggressive in raising the interest rate by 50 bps to 4.25 percent in September 2022.

It was stated that the monetary authority increased the portion of the increase in benchmark interest due to two reasons. First, inflation is moving too high. Second, the target is to reduce inflation faster than before next year.

"The decision to increase interest rates is a front load, pre-emptive, and forward looking step to reduce inflation expectations and ensure core inflation returns to its target of 3 percent plus minus 1 percent in the second half of 2023," he said.

In October, BI still maintained an increase in interest rates of 50 bps. So, in that period the interest rate that is valid is 4.75 percent.

"Bank Indonesia wants to ensure core inflation in the future returns to its target of 3 percent plus minus 1 percent earlier, namely to the first half of 2023," Perry said sharpening his statement last month.

Then, the interest rate was at 5.25 percent in November 2022 after the central bank set a policy of adding a benchmark interest rate of 50 bps. Finally, Bank Indonesia began to reduce the intensity of increase to 25 bps. So that in December 2022 or the closing of this year's applicable benchmark interest rate was 5.5 percent.

In his statement, Perry again revealed that this attitude was taken aimed at continuing to control inflation so that it could achieve the target set in the first semester of 2023.

"We want to ensure that inflation's continued decline in expectations (CP) and core inflation is maintained in the range of 3 percent plus minus one percent," he said.

In addition, the monetary policy adopted is expected to reduce rupiah depreciation due to the strengthening of the US dollar against various other currencies.

"The direction of monetary policy in 2023 will remain focused on maintaining stability (pro-stability) and inclusive and green economic and financial programs continue to be directed at encouraging growth (pro-growth), macroprudential policies, digitizing payment systems, deepening the money market," said BI Governor Perry Warjiyo.