Bank Indonesia maintains interest rates amid anomalous performance of the US dollar

BI Rate held steady at 5.75% as Bank Indonesia (BI) identifies anomalies in the performance of the US dollar.

US dollar performance anomalies

Despite facing challenges such as the US debt ceiling issue and expectations of the US Federal Fund Rate (FFR) reaching its peak, the USD index (DXY) remains strong. 

Governor of Bank Indonesia, Perry Warjiyo, stated that ongoing global financial uncertainty is among the key issues affecting the situation.

“A debt ceiling occurs but the DXY dollar index remains strong in the range of 102 to 104. We have to see that there is still geopolitical uncertainty and also in several other countries,” Warjiyo said.

Currency depreciation pressures are being felt worldwide, not only limited to the Rupiah. As a result, Bank Indonesia had emphasized the need to maintain the BI Rate to ensure stability in the rupiah exchange rate. 

Warjiyo elaborated that efforts to maintain the BI Rate “is aimed at keeping imported inflation low and mitigating the impact of financial market uncertainties.”

Rupiah exchange rate holds steady, Bank Indonesia assesses future possibilities

The rupiah exchange rate hovers around 14,948 per US dollar by May 25, 2023, showing minimal movement compared to the rate of 14,952 per US dollar on May 24, 2023. 

Bank Indonesia remains convinced that the Fed’s interest rates have reached their peak and sees the possibility of no further rate hikes in June. 

However, an anomaly arises as US inflation decreases at a slow pace, while US interest rates are expected to remain high for a longer period. 

Warjiyo remarked that the current condition is slightly different compared to the predictions of analysts, which projected a potential FFR decrease by the end of the year. 

Additionally, negotiations on the debt ceiling continue, with historical evidence suggesting a resolution or compromise between the US government and the Congress. 

“However, whether the compromise will involve a reduction in expenditure or capital spending is something we need to further examine in the negotiations likely to extend until June,” Warjiyo adds.

BI maintains BI7DRR rate at 5.75%

During the Board of Governors Meeting held on May 24-25, 2023, Bank Indonesia (BI) decided to keep the BI-7 Day Reverse Repo Rate (BI7DRR) at 5.75%. 

Meanwhile, the Central Bank’s deposit facility rate will remain at 5%, and the lending facility rate stands at 6.5%.

Governor Perry Warjiyo emphasizes the decision’s consistency with the monetary policy stance aimed at maintaining core inflation within the 3±1 percent range until the end of 2023. 

Additionally, the Consumer Price Index (CPI) is expected to return to the target range of 3±1 percent in the third quarter of 2023.

Previously, during the April 2023 Board of Governors Meeting, BI also decided to maintain the interest rates at 5.75%. 

The last increase in interest rates occurred in January 2023 when BI raised them by 25 basis points from 5.5% to 5.75%.