The Gap Between BI's and the Fed's Interest Rates Widens Again

At its Governor's Meeting (RDG) on May 16-17, 2018, Bank Indonesia (BI) decided to raise the BI 7-day Reserve Repo Rate by 25 basis points (bps) to 4.5%. BI also increased the Deposit Facility rate by 25 bps to 3.75% and the Lending Facility rate by 25 bps to 5.25%, effective May 18, 2018.

This BI rate hike was the first since November 2014 and the first since the implementation of the BI 7-day RR Rate as the benchmark interest rate on August 19, 2016. This increase in the BI 7-day RR Rate widened the gap with the United States Federal Reserve (The Fed) rate to 275 bps, up from 250 bps.

The Fed has raised its benchmark interest rate by 75 bps in the past year, while BI lowered its BI 7-day Rate by 50 bps. The possibility of further Fed rate hikes—up to three more times by the end of the year—is creating uncertainty in global financial markets. As a result, the US dollar is strengthening against major world currencies, including the Indonesian Rupiah. This is one of the factors contributing to the weakening of the Rupiah to above Rp 14,000 per US dollar.