To Strengthen the Rupiah, BI Raises Benchmark Interest Rate to 6.25% as of April 2024

Bank Indonesia (BI) raised its benchmark interest rate, the BI 7-Day Reverse Repo Rate (BI7DRR), by 25 basis points (bps) to 6.25% in April 2024.

Following this policy, the Deposit Facility interest rate also increased by 25 bps to 5.50%, and the Lending Facility interest rate increased by 25 bps to 7.00%.

The interest rate hike was decided during the BI Board of Governors Meeting (RDG) on April 23-24, 2024. This is the first increase since the beginning of 2024, following the last increase in October 2023.

Perry Warjiyo, Governor of BI, stated that the interest rate hike aims to strengthen the rupiah exchange rate, which has been weakening due to the deteriorating global risk.

Furthermore, the interest rate hike is emphasized as a pre-emptive and forward-looking measure to ensure inflation remains within the target of 2.5±1% in 2024 and 2025, in line with the principle of monetary policy that prioritizes stability.

Macroprudential and payment system policies remain pro-growth to support sustainable economic growth. On the one hand, a loose macroprudential policy continues to be pursued to encourage bank credit/financing to businesses and households.

Influence of US Policy Direction and the Middle East Conflict

In his statement, Perry also explained that the dynamics of the global financial economy are changing rapidly, leading to increased uncertainty due to changes in the direction of US monetary policy. Another factor is the worsening geopolitical tensions in the Middle East.

Persistently high inflation and strong US economic growth are fueling speculation of a smaller and longer-than-expected reduction in the Fed Funds Rate (FFR), consistent with statements from Federal Reserve System officials.

These developments and the large US debt needs have resulted in a continued increase in US Treasury yields and a strengthening US dollar globally. The strengthening US dollar is also driven by the weakening of several world currencies, such as the Japanese yen and the Chinese yuan.

"Uncertainty in the global financial market is worsening. As a result, global investors are shifting their portfolios to safer assets, particularly the US dollar and gold, causing capital flight and an increasing weakening of exchange rates in developing countries," said Perry in an official statement on the BI website, Wednesday (24/4/2024).

(Read also: BI Holds Benchmark Interest Rate at 6% in March 2024)