Based on the statement released by Bank Indonesia, this decision is consistent with its monetary policy stance to keep inflation within the 2.0–4.0 percent year-on-year (y/y) target range in 2023, and 1.5–3.5 percent (y/y) target range in 2024, while at the same time focusing on strengthening the stability of the rupiah exchange rate in anticipation of the contagion effect of global financial market uncertainty.

So, one interesting new thing is actually that Bank Indonesia has now confirmed that it expects even lower inflation for Indonesia in 2024 than in 2023.

As is widely known there are three key matters Bank Indonesia needs to keep a close eye on when formulating its monetary policy: (1) monetary policy decisions taken by the US Federal Reserve, (2) the value of the rupiah, and (3) Indonesian inflation.

Indonesian inflation is not only under control, but is also discussed in another article in this report, and so we focus here on the US Federal Reserve and the performance of the rupiah exchange rate (versus the US dollar).

Federal Reserve

As expected by markets, the US Federal Reserve kept its benchmark interest rate in the range of 5.25 – 5.50 percent at its September 2023 policy meeting, hence pausing its extended campaign to combat US inflation.

US borrowing costs are currently at their highest levels in more than two decades, and thus making it more expensive for Americans to take out loans (mortgages) and carry credit card debt. By damping demand for purchases like homes and cars, the Federal Reserve seeks to push inflation lower (while at the same time trying to avoid an economic recession). It is a tough battle that is showing signs of progress as price increases have indeed moderated so far in 2023.

Since March 2022, the Federal Reserve has lifted interest rates 11 times, and held them steady twice, including the pause in September 2023. What is also interesting is that Federal Reserve officials expect fewer interest rate cuts next year than was previously estimated, confirming investors’ fears that US interest rates could remain elevated for a longer period of time.


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