Bank Indonesia Raises BI 7-Day Reverse Repo Rate by 25 bps

Bank Indonesia's (BI) extraordinary Board of Governors meeting on May 30, 2018, decided to raise the 7-day Reserve Repo Rate by 25 basis points (bps) to 4.75%. The Fed's interest rate stands at 1.75%. In addition to raising the benchmark interest rate, BI also increased the Deposit Facility rate by 25 bps to 4% and the Lending Facility rate by 25 bps to 5.5%, effective May 31, 2018.

This is the second benchmark interest rate hike in the last month, bringing the total increase in the BI 7-day rate to 50 bps since April 2018. This is the first rate hike under the leadership of the new BI Governor, Perry Warjiyo. As a result, the interest rate differential between the rupiah and the US dollar has widened to 300 bps. This widening of the gap between BI's benchmark interest rate and the US Federal Reserve's rate is expected to alleviate pressure on the rupiah.

This policy is a pre-emptive, front-loading, and ahead-of-the-curve measure by the central bank to strengthen stability, particularly exchange rate stability, in anticipation of higher US interest rates and increased risks in the global financial market. The improving US economy is expected to lead to higher inflation, thus prompting the Fed to raise interest rates. A Fed rate hike would strengthen the US dollar and influence global monetary policy, including that of Indonesia.