Bank Indonesia (BI) Governor, Perry Warjiyo, has presented a projection indicating that the US Federal Funds Rate (FFR) may experience a potential increase, reaching 5.75 percent by September 2023. Should the Federal Reserve (The Fed) pursue a hawkish approach, the Federal Funds Rate could align with Indonesia’s benchmark interest rate, the BI Rate.
Perry conveyed this information during the discussion of the Financial System Stability Committee (KSSK) meeting and stated, “Our baseline projection for the Fed Funds Rate is that it will rise again in September. We are closely monitoring the economic growth in the US, which is showing positive signs. We are still waiting to see if inflation will come down more rapidly or not. As of now, we still anticipate the Fed Funds Rate to increase one more time.”
As a significant development, such a scenario is expected to impact capital inflows to emerging economies, making them more selective, and subsequently exerting increased pressure on exchange rates in countries beyond the US, including Indonesia.
In the light of these potential fluctuations, Bank Indonesia is diligently observing the inflation trends in the US while maintaining its own BI 7-Day Reverse Repo Rate (BI7DRR) at 5.75 percent this month. The prudent decision by BI is aimed at safeguarding the stability of the rupiah exchange rate amidst the backdrop of uncertain economic conditions, particularly influenced by the decisions made by The Fed.
Governor Perry affirmed, “In essence, we will ensure that the impact on the exchange rate stability remains preserved, and we will continue to coordinate with KSSK to address any arising challenges.”
The Federal Reserve has recently implemented a benchmark interest rate increase of 25 basis points (bps), raising it to a range of 5.25 percent to 5.5 percent during the July 2023 meeting. This marks the 11th rate hike by The Fed within its last 12 meetings.
With caution and consideration, The Fed conveyed, “The Federal Open Market Committee [FOMC] will continue to assess additional information and its implications for monetary policy.”
The significance of these interest rate developments cannot be understated, as reported by Bloomberg, this marks the highest benchmark interest rate level since 2001, signifying a clear shift in monetary policy direction. Furthermore, this 11th rate increase by The Fed since March 2022, when the rate was near zero, has raised questions and concerns among economic observers.
Notably, the potential impact of these rate changes on emerging economies, including Indonesia, is a matter of attention and scrutiny for policymakers. The surge in benchmark interest rates has implications for capital inflow, foreign exchange reserves, trade balances, and economic growth prospects, all of which necessitate careful monitoring and strategic responses.
As Governor Perry emphasizes the importance of safeguarding exchange rate stability and maintaining coordination with relevant financial authorities, BI’s proactive stance is an essential component of Indonesia’s economic resilience in the face of global economic uncertainties. As the situation unfolds, market players, businesses, and policymakers are keenly observing the dynamics of global monetary policies and their potential implications on the Indonesian economy.