Indonesia’s central bank (Bank Indonesia) – finally – decided to raise its benchmark interest rate by 25 basis points to 3.75 percent after concluding its two-day policy meeting on 23 August 2022, thereby joining the global wave of rate hikes as central banks need to combat accelerated inflation, while –especially in emerging markets – higher rates also function to prevent too much capital outflows as US assets become more attractive amid aggressive US Federal Reserve tightening.
Meanwhile, Bank Indonesia also raised its deposit facility and lending facility rates by 25 basis points to 3.00 percent and 4.50 percent, respectively.
Based on a statement in the press release that was issued by Bank Indonesia shortly after concluding its monetary policy meeting, the rate hike:
“Represents a pre-emptive and forward-looking measure to mitigate the risks posed by rising core inflation, and inflation expectations caused by higher non-subsidized fuel prices and a build-up of inflationary pressures on volatile food products, while strengthening rupiah exchange rate stabilization policy in line with the rupiah rate's fundamental value amid persistently elevated global financial market uncertainty, and stronger domestic economic growth momentum.”
It is interesting that Bank Indonesia calls this decision a “pre-emptive and forward-looking measure” because for months it had been clear that headline inflation would rise well above the central bank’s target range, while the rupiah rate has been under pressure since the second half of April 2022. Central banks in the US, Europe, Canada and parts of Asia have already acted by lifting interest rates over the past couple of months. So, one can certainly argue that Bank Indonesia is well behind the curve.
It is the first time since the second half of 2018 that Bank Indonesia raised its key interest rate. From February 2021 to July 2022 the rate was kept at 3.50 percent.
As is made clear in Bank Indonesia’s statement, the interest rate hike is fully related to Indonesia’s inflation rate and the rupiah exchange rate. And therefore, we need to take a quick look at inflation and the rupiah.
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