Bank Indonesia Raises Benchmark Interest Rate by 50 bps to 5.25%

The Bank Indonesia (BI) Board of Governors (RDG) meeting held on November 16-17, 2022, decided to raise the BI 7-days Reserve Repo Rate (BI7DRR) benchmark interest rate by 50 basis points (bps) to 5.25%.

This aggressive 50 bps increase in the BI7DRR is the third consecutive increase since August 2022, reaching its highest level in over three years, as shown in the graph.

This is also the fourth increase this year. In total, the BI's benchmark interest rate has increased by 175 bps this year. With this increase, the net interest rate differential between the rupiah and the US dollar has widened again to 175 bps. As is known, the US central bank raised The Fed's interest rate by 75 bps to the range of 3.75-4% in early November.

In addition to raising the benchmark interest rate, the BI RDG also raised the Deposit Facility rate by 50 bps to 4.5% and the Lending Facility rate by 50 bps to 6%.

BI Governor Perry Wajiyo, in his official release, stated that the interest rate hike decision was a front-loaded, pre-emptive, and forward-looking measure to lower inflation expectations, which are currently still high. This policy aims to ensure that core inflation returns to the target of 3.0% +/- 1% earlier, namely in the first half of 2023.

"This step is also intended to strengthen the policy of stabilizing the rupiah exchange rate so that it is in line with its fundamentals due to the strengthening of the US dollar and high uncertainty in the global financial market amid continued strong domestic economic demand," Perry said in his press release on Thursday (November 17, 2022).

BI is also continuing to strengthen its policy mix response to maintain stability and the momentum of economic recovery.

Furthermore, Perry stated that global economic growth in 2023 is projected to decline from 2022, with the risk of a lower correction and a high recession in several countries, including the US and Europe. The global economic slowdown is influenced by the continuation of geopolitical tensions that trigger economic, trade, and investment fragmentation, as well as the impact of aggressive monetary tightening.

Global inflation and core inflation pressures remain high due to ongoing supply chain disruptions and tight labor markets, especially in the US and Europe. As a result, central banks in many countries continue to strengthen aggressive monetary tightening policies.

Meanwhile, the Indonesian economy continued to strengthen in the third quarter of 2022, growing by 5.72% (year-on-year/yoy), higher than the previous estimate of 5.45% (yoy). Growth in the July-September 2022 period was supported by the continued improvement in domestic demand and the continued high performance of exports.

The strengthening trend of the US dollar amid high uncertainty in the global financial market has weakened the exchange rates of almost all world currencies, including the rupiah. With the stabilization efforts undertaken by BI, the rupiah exchange rate depreciated by 8.65% against the US dollar until November 16. This figure is lower than the depreciation of the South Korean currency, which has weakened by 10.3% (ytd), and the Philippine currency, which has also depreciated by 11% (ytd).