Does the BI Interest Rate Hike Affect Economic Growth?

Bank Indonesia (BI) raised its 7-day rate twice last month, during the Board of Governors meetings (RDG) on May 16-17 and May 30, 2018. This measure was taken to stabilize the Indonesian Rupiah, which was under pressure and exceeding Rp 14,000 per US dollar. However, an increase in BI's benchmark interest rate usually impacts economic growth, as shown in the graph below.

Based on historical data from BI and the Central Bureau of Statistics, every increase in BI's interest rate has affected domestic economic growth. In 2005, BI raised its benchmark BI Rate to over 12%, resulting in a slowdown in economic growth, which reached only 4.59% in the first quarter of 2016. Similarly, in 2008, when the BI Rate rose to over 9%, the Indonesian economy again slowed down, growing only 4% in the second quarter of 2009.

Then, in 2013, when the BI Rate showed an upward trend reaching 7.5%, the domestic economy slowed down again and grew below five percent. Compare this to the situation when the BI 7-day Rate fell to its lowest level of 4.5%, with the economy growing steadily at 5%. If consumer spending remains stagnant and government spending is not boosted, the domestic economy could potentially slow down as interest rates rise.

(Read Databoks: Indonesia's Economic Growth Since 1961)