To Curb Inflation, the Fed Raises Key Interest Rate by 25 Basis Points

The United States Federal Reserve (The Fed) raised its benchmark interest rate by 25 basis points (bps) to 0.25% on Wednesday, March 16, 2022. The Fed increased the rate to control high inflation over the past year.

This is the first increase since late 2018, when The Fed raised the benchmark interest rate to 2.5%. It's also the first increase since March 2020, when The Fed cut its benchmark interest rate to its lowest level of 0.25%.

According to the U.S. Bureau of Labor Statistics (BLS), inflation in February 2022 was 0.8% compared to the previous month (month-to-month/m-to-m). Compared to February 2021, the inflation rate in the United States reached 7.9% (year-on-year/YoY).

The recovering global economy and the easing impact of the Covid-19 pandemic have increased global commodity demand. This has driven up global commodity prices, particularly energy commodities. This situation is now exacerbated by the tension between Russia and Ukraine.

Rising oil prices pushed energy inflation to 25.6% (YoY) in February 2022. Energy commodity inflation reached 37.9% (YoY), with gasoline inflation at 38% (YoY) and fuel oil inflation at 43.6% (YoY).

Meanwhile, at the Board of Governors Meeting (Rapat Dewan Gubernur/RDG) of Bank Indonesia (BI) on March 16-17, 2022, it was decided to maintain the BI 7-Day Reserve Repo Rate (BI7DRR) at 3.5%. This decision is in line with the need to maintain the stability of the Rupiah exchange rate, control inflation, and encourage domestic economic growth.