Indonesian Minister of Finance, Sri Mulyani Indrawati, has underlined that the period of high central bank interest rates is not entirely gone eventhough the Federal Reserve cuts its Fund Rate by 50 basis points in September 2024.
According to Sri Mulyani, the Fed’s benchmark interest rate is currently between 4.75 to 5.00 percent, which is still a significant amount given that it has increased by about 500 basis points over the previous four years.
Speaking at an event at the Jakarta Convention Center on October 8, 2024, Sri Mulyani responded to the statement of BNI President Director Royke Tumilaar, who said that the era of high interest rates was over.
“Although the Fed’s interest rate has fallen, the interest rate of 5 percent or 4.75 percent is still high. And it is currently at that level,” she said.
However, amidst this high interest rate situation, Sri Mulyani emphasized that the Indonesian economy is still able to grow steadily. This, according to her, is inseparable from Indonesia’s success in maintaining a low current account deficit and a trade balance surplus in recent years.
Sri Mulyani reminded of the negative impacts experienced by Indonesia during the taper tantrum period in 2014-2015, where the announcement by the Fed at that time was enough to put pressure on the Indonesian economy. However, currently, despite the significant increase in interest rates from the Fed, Indonesia has managed to maintain its stability.
“In the past, such announcement of the taper tantrum was enough to make us endure the ‘fever’. However, this time, even though the interest rates have increased by more than 500 basis points since 2022, our economy remains strong,” she said.
Sri Mulyani, however, warned that high interest rates can have serious impacts, especially for investors. She emphasized that an interest rate increase of 500 basis points can suppress the internal rate of return (IRR) and increase the risk of non-performing loans (NPLs), which in turn affects the economy.
Downstreaming and budgetary control
According to Sri Mulyani, the downstream program, which makes a major contribution to economic growth, is one of the essential elements preserving Indonesia’s economic resiliency. Macroeconomic stability is further supported by sound fiscal management and strong cooperation between the Indonesian Central Bank (BI) and the Ministry of Finance.
“We have managed to keep the economy growing amidst extraordinary challenges, from the pandemic, geopolitical conflicts, to the highest global inflation in the last 40 years. This shows Indonesia’s strong economic resilience,” she remarked.
In order for the incoming administration to get off to a strong start, she suggested the implementation of proper mix of monetary and fiscal policies.
Sri Mulyani stressed that the macroeconomic stability that exists now is the product of the government’s diligent efforts rather than an accident.
“This is not something that just happens. Many countries are currently facing macroeconomic and fiscal stability issues. Indonesia must continue to maintain this capital for the future,” she concluded.
