Unlike the Fed, Bank Indonesia Will Still Hold Interest

Bank Indonesia

The need to accelerate growth and strong economic fundamentals have prompted Bank Indonesia (BI) to maintain its benchmark interest rate this month.

This has made Indonesia’s central bank confident in holding interest rates during a tighter global monetary policy trend such as the Fed.

Governor Perry Warjiyo and other members of the Board of Governors are scheduled to hold a Board of Governors Meeting (RDG) April 2022 on April 18-19 2022.

Market consensus estimates that the BI 7 Day Reverse Repo Rate will remain at 3.5%. Of the 14 institutions involved in forming the consensus, only one projected that BI will raise its benchmark interest rate this month.

If it matches expectations, then the benchmark interest rate will stay at 3.5% since February 2021 or has held for the last 14 months. The 3.5% level is the lowest benchmark interest rate in Indonesia’s history.

Danareksa Research Institute economist Muhammad Ikbal Iskandar said BI would choose to hold its benchmark interest rate this month despite mounting global uncertainty due to the Russia-Ukraine war.

“Indonesia’s economic fundamentals are very good as reflected in the trade balance surplus, foreign exchange reserves, and money supply,” said Ikbal, in the February 2022 Economic Report: Russia-Ukraine Geopolitical Tensions Affected Indonesia’s Economic Indicators.

Similarly, Bank Mandiri chief economist Andry Asmoro said economic fundamentals, especially rupiah stability, were maintained with a trade balance surplus.

The large trade balance surplus is expected to boost the current account surplus in the first quarter of 2022. With a current account surplus, the movement of the rupiah will be more stable.

“This condition will minimize the external impact and help BI not to rush in raising interest rates amid the normalizing trend of monetary policy,” said Andry in the April 2022 Macro Brief Trade Balance report.

Apart from maintaining economic fundamentals, Bank Indonesia is expected to hold its benchmark interest rate on hold due to the need to accelerate growth.

Bank credit growth in February 2022 had already grown by 6.33% (year on year/Yoy), higher than January 2022 (5.5%) but still far below pre-pandemic credit growth.

Indonesia’s economic recovery that has just started is also still vulnerable to threats such as a decline in people’s purchasing power so low-interest rates are still needed.

As is known, the Central Statistics Agency (BPS) announced that Indonesia scored a trade balance surplus of US$ 4.53 billion in March 2022. This surplus is the third-largest in history after October 2021 (US$ 5.73 billion) and August 2021 (US$ 4.75 billion).