BI Intersections: Raising Interest Rates Follow The Fed Or Conservatives Due To Down Inflation

JAKARTA Bank Indonesia (BI) is known to have set a benchmark interest rate of 5.75 percent since January 19, 2023.

This level has not changed after BI previously raised interest rates gradually starting in the second half of 2022 in order to reduce the inflation rate.

The bank's strategic policy now faces two challenges in itself.

First, the increasingly maintained inflation movement has made it predicted that the monetary authority will maintain the BI rate.

BI Governor Perry Warjiyo had stated that inflation had fallen faster than the initial estimate, namely in August 2023.

This is reflected in general inflation (consumer price index / IHK) which has reached 4.00 percent year on year (yoy) in May 2023.

In fact, this figure was sharpened to 3.52 percent at the close of last June.

The score has clearly been included in the target of 3 percent plus minus 1 for this year.

Likewise, core inflation is a special benchmark in determining interest rates. P

June, core inflation was perched at the level of 2.58 percent yoy, better than May which was 2.66 percent.

Then if studied monthly (month to month/mtm), core inflation only slightly increased to 0.12 percent from the previous 0.06 percent. The book is more well maintained than the April 2023 Eid period which amounted to 0.25 percent.

Meanwhile, the second challenge came from external factors, namely the Central Bank of the US The Federal Reserve aka The Fed. In the last BI Board of Governors' Meeting (RDG) last June, Perry revealed that his party had received a signal that the Fed would return hawkish by raising the benchmark interest rate.

"Our Fed Fund Rate will increase (to) 5.50 percent in July," he said.

He explained that this prediction was based on the latest developments in the American economy as well as statements by the Governor of the Fed and other members.

Moreover, high inflation occurs in the service sector. There used to be an immigration policy to supply labor, but now it is limited. That's why it takes longer for the effectiveness of the Fed Fund Rate to reduce inflation," he said.

In detail, Perry said, if the problem involving the US struggles on the high demand side (demand) without being able to be met by the supply aspect.

To note, BI also has an interest in being adaptive to the Fed's policies because of its duty to maintain the rupiah exchange rate.

In addition, Bank Indonesia has its own mission to help the government bond market continue to attract investors in terms of yields offered.

Just so you know, the editors found it interesting during the last RDG press conference last June.

At that time, Governor Perry no longer used the terminology to describe the level of interest rates that were considered sufficient.

In fact, the central bank previously always stated that the BI rate was 'adai' to accommodate economic targets by the end of the year.

So, is this a signal for Bank Indonesia to raise interest rates again higher than 5.75 percent? The answer lies with the Board of Governors Meeting on July 24-25, 2023.