Tuesday, May 28, 2024

The Fed raises interest rates, Bank Indonesia stays still

Reading Time: 2 minutes
Novi Nurmalasari

Journalist

Editor

Interview

The United States central bank, the Federal Reserve (Fed) raised its benchmark interest rate by 25 basis points (bps) to a range between 4.75 percent and 5 percent on Wednesday (22/3). The Fed has chosen to push through its campaign on increasing its interest rate in an attempt to bring inflation back to normal despite the stress in the banking industry following the collapse of two regional banks. 

The leaders of The Fed also implied that the increase in its interest rate will eventually come to an end. Such signals are apparent from the projection of the peak interest rate policy of the Fed in 2023, which remains at the level of 5.25 percent.

Regarding this issue, Economist and Director of the Center of Reform on Economics (CORE), Piter Abdullah, said that Indonesia is relatively safe from the impact of the increase in the Fed benchmark interest rate.

“The Fed’s interest rate only has an impact on the financial market, not directly on the real sector. Meanwhile, Indonesia’s economic growth is driven by the real sector,” said Piter, quoted from Voi, Friday (24/3).

Therefore, Bank Indonesia (BI) is yet to respond by increasing its benchmark interest rate by 25 basis points (bps) or 0.25 percent as the Fed does.

This is because Indonesia is considered relatively resilient in dealing with the increase in the benchmark interest rate, with its interest rate above 5 percent. 

Abudllah added that even though BI decided to increase its benchmark interest rate, it will not affect the Indonesian economy by much.

The Fed’s interest increase peaks soon, Economist says

In line with these statements, an economist from Bank Mandiri, Faisal Rachman, asserted that the Fed’s policy provides an opportunity for BI to maintain its benchmark interest rate at a level of 5.75 percent until the end of 2023. 

With the Fed signaling that it will not change its terminal rate in 2023, this means that the Fed’s interest rate will approach its peak, Faisal added. 

The reason why BI choose not to follow the Fed in raising interest rates is also based on Indonesia’s domestic economic conditions, which are also favorable. 

Until February 2023, Indonesia’s trade balance remained in surplus by US$5.48 billion. Foreign reserves also increased to US$140.3 billion.

Inflation is also showing a downward trend, decreasing from 5.95 percent YoY in September 2022 to around 5.47 percent in February 2023. 

These conditions have successfully stabilized the Rupiah exchange rate and consequently enabled the economy to hold inflation at bay, especially from the perspective of imported inflation. 

Previously, BI Governor, Perry Warjiyo explained that global economic condition is one of BI’s considerations in determining the direction of monetary policy, including the benchmark interest rate. 

However, Warjiyo emphasized that external factors are not the main considerations for BI in deciding policies. There are more essential conditions, such as the domestic condition. 

With the current benchmark rate of 5.75 percent, BI also believes that it can control inflation related to food prices as they target the consumer price index (CPI) inflation to be below 4 percent annually by September 2023.

Novi Nurmalasari

Journalist

 

Editor

 

Interview

SUBSCRIBE NOW
We will provide you with an invoice for your reimbursable expenses.

Free

New to Indonesian market? Read our free articles before subscribing to the premium plan. If you already run your business in Indonesia, make sure to subscribe to the premium subscription so you won’t miss any intelligence & business opportunities.

Premium

$550 USD/Year

or

$45 USD/Month

Cancelation: you can cancel your subscription at any time, by sending us an email inquiry@ibp-media.com

Add keywords to your market watch and receive notification:
Schedule a free consultation with us:

We’ll contact you for confirmation.

FURTHER READING

Indonesian Foreign Minister Retno Marsudi has called for a ceasefire between Israel and Palestinian militant Hamas in the wake of the seven-month conflict, with Israel threatening to invade Rafah, a city of 2.5 million people in Gaza Strip.
Fishermen, local communities, indigenous groups and environmental activists around the world are lashing out at Japan and its export credit agency, the Japan Bank for International Cooperation (JBIC).
A number of parties have started to anticipate the impact of the conflict between Israel and Iran on investor interest in startups as the conflict can affect the macro economy, particularly in the Middle East.
President Xi Jinping has emphasized China’s commitment to improving the lives of its people and clarified its collaborative approach with other nations, entities such as APEC, and including superpowers like the United States, during a meeting at the Asia-Pacific Economic Cooperation (APEC) forum.
China’s conditions for a meeting between U.S. President Joe Biden and Chinese President Xi Jinping, as outlined by China’s Ministry of State Security (MSS). The conditions set by the MSS include the United States showing sincerity for such a meeting to take place. 
China’s Global Security Initiative (GSI) is intensifying its campaign for an alternative to the US-led international order, connecting it to its peace plan for Ukraine and rapprochement between Iran and Saudi Arabia.