Bank Indonesia increased interest rates by 50 bps which was more than expected on Thursday as it sought to stall in inflation and strengthen the rupiah exchange rate. Indonesia’s annual inflation rate accelerated to 5.95% in September 2022, marking the fastest rise in consumer prices since October 2015. The move was the third hike this year and bringing borrowing costs to the highest since February 2020.
Bank Indonesia (BI) raised the 7-day reverse repurchase rate by 50 basis points to 4.75%. Headline and core inflation remain elevated and above the bank’s target 2–4% range for the fourth straight month. Indonesia’s annual inflation rate accelerated to 5.95% in September 2022, marking the fastest rise in consumer prices since October 2015.
Indonesia’s central bank, BI sought to rein in inflation after the government raised subsidized fuel prices earlier in August, while also supporting the rupiah currency. It was also the third consecutive rate increase this year. The bank also raised the overnight deposit facility and lending facility rates by the same amount to 4.00 percent and 5.50 percent, respectively.
Policymakers noted that the economy was in a good position, supported by increased private consumption and continued strength in exports.
“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