Bank Indonesia has set the benchmark interest rates for the BI 7-Day Reverse Repo Rate (BI7DRR) unchanged. The results of the Board of Governors’ Meeting of Bank Indonesia (RDG) July 20-21, 2022 determined that BI7DRR was maintained at the level of 3.5 percent. This result is in line with Bank Indonesia’s belief that core inflation will be maintained and will keep an eye on inflation expectations going forward.
Economists also project an upward cycle to begin in the third quarter of 2022.
“With a comprehensive assessment, the Bank Indonesia Board of Governors Meeting decided to maintain the BI 7-Day Reverse Repo Rate [BI7DRR] at 3.5 percent,” said Bank Indonesia Governor Perry Warjiyo in the July 2022 BI RDG Results Announcement today, Thursday (21 /7/2022).
In line with this decision, Bank Indonesia (BI) set the Deposit Facility interest rate at 2.75 percent and the Lending Facility interest rate at 4.25 percent.
“This decision is consistent with the estimated core inflation that is still under control amidst the risk of the impact of the global economic slowdown on domestic economic growth,” he said.
Before the announcement of BI’s benchmark interest rate, Oxford Economics Lead Economist Sian Fenner in his research projected that BI and central banks of other ASEAN countries would begin to raise their benchmark interest rate in the second half of this year.
He estimates that BI will start a cycle of rising interest rates in the third quarter of 2022 in line with inflation that is still above the target range during the second semester of 2022.
“We estimate a total interest rate increase of up to 75 basis points during the second half of 2022, which will provide support for the rupiah exchange rate against the US dollar,” said Sian in his research.
He said that the strong trade impetus had limited the need for BI to take the pace of rate hikes aggressively.
It is known, that BI has kept interest rates at historical lows for 17 consecutive months since February 2021.
BI’s move is different from that of many global central banks that have raised interest rates, including the Federal Reserve. BI is not moved even though the Fed is expected to be aggressive again in raising interest rates next week by 75 bps.
BI also estimates that inflation this year will be higher than the maximum target of 4%. However, according to Perry, core inflation, which is an indicator of BI in determining interest rate policy, will remain under control at below 4%.
On the other hand, the rupiah exchange rate, which has always been a consideration for BI regarding interest rate policies, was observed to be relatively stable compared to other Asian currencies. According to Perry, the rupiah is under increasing pressure due to uncertainty in global financial markets. However, similar conditions are also experienced by regional currencies.
Based on BI records, the rupiah exchange rate until July 20, 2022, has depreciated 4.90% compared to the level at the end of 2021. This depreciation is relatively better than the depreciation of currencies of several other developing countries, such as Malaysia at 6.41%, India at 7.07%, and Thailand at 8.88%.
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