BI Gives Explanation Regarding Its Monetary Policy

Source: Dimas Ardian/Bloomberg

The steps taken by Bank Indonesia (BI) regarding its monetary policy have raised questions from many parties. They were surprised by BI’s policy of not raising the benchmark interest rate when there was a good opportunity a while ago.

BI even raised the benchmark interest rate when many expected it to remain the same. This is what makes them wonder.

Regarding this confusion, the Head of the Department of Economic and Monetary Policy, Solikin M. Juhro explained that interest rate policy is based on several components. One of them is the expectation of future inflation.

“RDG raised 25 bps as a pre-emptive and forward-looking measure to look at core inflation and inflation expectations,” he said, quoted Wednesday (7/9/2022)

The option to increase the benchmark interest rate, said Solikin, must be done carefully. Especially when the national economy is still recovering from the impact of the COVID-19 pandemic.

“We see the economy well, how to grow and be careful with interest rates, how to increase interest rates,” he explained.

BI will continue to encourage economic growth and maintain stability. Several policies have been issued to achieve this goal.

As previously reported, Bank Indonesia (BI) decided to increase the BI 7 Days Reverse Repo Rate (BI7DRR) by 25 basis points to 3.75%. This policy was decided at the Board of Governors Meeting (RDG) Tuesday (23/8/2022). Some market parties were surprised by BI’s decision.

BI Governor Perry Warjiyo in a press conference after the RDG, Tuesday (8/23/), said, “The Bank Indonesia Board of Governors Meeting on August 22-23 2022 decided to increase the BI 7 Day Reverse Repo Rate by 25 basis points (bps) to 3.75%, Deposit Facility interest rate is 3%, and Lending Facility interest rate is 4.5%.”

According to him, this policy was taken after considering global and domestic economic conditions. From a global perspective, Perry assessed that the economic recovery process would be disrupted amid a surge in inflation and monetary policy in several countries.

“The global economy is at risk of slower-than-expected growth, accompanied by increased risks of stagflation and heightened financial market uncertainty,” Perry said.

The results of this RDG are beyond market expectations. Some consensus states that the majority of respondents expect MH Thamrin to still maintain the benchmark interest rate.

Of the 15 institutions involved in forming the consensus, 13 projected that BI would maintain the benchmark interest rate at 3.50%. The other two expect BI to raise interest rates by 25 bps to 3.75% this month.