Bank Indonesia increased interest rates by 50 bps which was more than expected on Thursday as it sought to rein in inflation. The Indonesian central bank sees end-2022 headline inflation at slightly above 6%. The move follows a plethora of central banks hiking rates this week. First off was Sweden’s Riksbank on Tuesday with a 75 basis-point hike. Wednesday the Fed raised 75bps. Brazil’s central bank remained unchanged after the FOMC.
Bank Indonesia (BI) raised the 7-day reverse repurchase rate by 50 basis points to 4.25%. Out of 30 economists polled by Reuters, 27 had expected a 25-basis point move, while the remaining three had bet on the larger 50 basis point rate hike. Headline and core inflation remain elevated and above the bank’s target 2–4% range.
Indonesia’s central bank, BI sought to rein in inflation after the government raised subsidized fuel prices earlier this month, while also supporting the rupiah currency. It was also the second consecutive rate increase this year. The bank also raised the overnight deposit facility and lending facility rates by the same amount to 3.50 percent and 5.00 percent, respectively.
“Inflationary pressures are expected to increase this month [following] the adjustment of the subsidized fuel prices while global energy and food prices remain high,” Bank Indonesia Gov. Perry Warjiyo said. He cited a Bank Indonesia survey that showed inflation is expected to accelerate to 5.89% this month, with “second-round impacts” from the fuel prices continuing over the next three months.
“Therefore by the end of this year, [consumer price index] inflation will surely be a little higher than 6%,” he said.
Warjiyo added that Thursday’s rate hike is “a front-loaded, preemptive and forward-looking measure” to reduce inflation expectations and ensure that Indonesia’s core inflation will return to the central bank’s target range during the second half of 2023.
Inflation is the Issue
Rupiah stability has been maintained despite increasing global financial market uncertainty.
As of 21st September 2022, the rupiah depreciated 1.03% (ptp) on the level recorded at the end of August 2022. Rupiah performance has been maintained with the support of domestic foreign exchange supply, positive perception concerning Indonesia’s economic outlook as well as BI stabilisation measures. As of 21st September 2022, therefore, the rupiah depreciated 4.97% (ytd) on the level recorded at the end of 2021, which is nevertheless comparatively lower than the currency depreciation experienced in other peer countries, such as India (7.05%), Malaysia (8.51%) and Thailand (10.07%). Moving forward, Bank Indonesia will continue to strengthen rupiah stabilisation policy in line with the currency’s fundamental value, thereby reinforcing macroeconomic stability and efforts to manage inflation.
From The TradersCommunity Research Desk