BI Holds Reference Interest Rate at 6.25% in August 2024

Bank Indonesia (BI) maintained its benchmark interest rate, the BI 7-Day Reverse Repo Rate (BI7DRR), at 6.25% in August 2024. This decision was made during the BI Board of Governors meeting on August 20-21, 2024.

The deposit facility interest rate remains at 5.50%, and the lending facility interest rate at 7.00%.

"This decision remains consistent with the focus of pro-stability monetary policy," BI stated on its website on Wednesday (August 21, 2024).

This pro-stability monetary policy aims to further strengthen the stability of the Rupiah exchange rate and employs pre-emptive and forward-looking measures to ensure inflation remains within the target of 2.5% ± 1% in 2024 and 2025.

BI explained that Indonesia's economic growth remains strong, supported by domestic demand and exports. Second-quarter 2024 economic growth was recorded at 5.05% (yoy), primarily driven by household consumption and investment. Exports increased, boosted by demand from major trading partners and a rise in service exports.

"Household consumption needs to be further increased in line with the end of seasonal factors related to National Religious Holidays (HBKN) and the impact of the general election in the first half of 2024," BI wrote.

BI added that the Rupiah exchange rate strengthened, supported by BI's monetary policy mix, increased foreign capital inflows, and easing global financial market uncertainty.

Up to August 20, 2024, the Rupiah strengthened to Rp15,430/USD, a 5.34% appreciation compared to its position at the end of July 2024. According to BI, this strengthening is higher than the appreciation of regional currencies such as the Thai baht, Japanese yen, Philippine peso, and Korean won, which were only 4.22%, 3.25%, 3.20%, and 3.04%, respectively.

Comparing this development to the end of December 2023, the level of Rupiah depreciation was smaller than the depreciation of the Indian rupee, Philippine peso, and Korean won.

"Looking ahead, the Rupiah exchange rate is expected to continue to strengthen in line with attractive yields, low inflation, Indonesia's continued strong economic growth, and Bank Indonesia's policy commitment," BI stated.

Globally, uncertainty in international financial markets is beginning to ease, although risks remain high. The global economy is projected to grow by 3.2% in 2024, with a tendency towards slowing down. The US economy is expected to begin slowing in the second half of 2024 due to declining domestic demand. Meanwhile, the Chinese economy remains weak, and the European economy continues to improve.

The slowdown in the US economy, BI said, is impacting rising unemployment and faster-than-expected inflation decline towards the long-term inflation target of 2%.

"This development is driving stronger expectations of a faster and larger reduction in the Fed Funds Rate (FFR) than previously forecast," BI stated.