BI Increases BI7DRR by 4.25%

Source: Dimas Ardian/Bloomberg

After last August Bank Indonesia (BI) raised the benchmark interest rate for the first time in 45 months, now they are raising the BI 7-Day Reverse Repo Rate (BI7DRR) by 50 bps to 4.25%. This shocked the market

the deposit facility interest rate rose to 3.5% and the lending facility interest rate to 5%.

This decision was stipulated in the September 2022 BI Board of Governors Meeting, Thursday (22/9/2022). The RDG was held for two days to determine the direction of the central bank’s interest rates and monetary policy.

“The meeting of the Board of Governors of Bank Indonesia on September 21-22 2022 decided to increase the BI 7 Day Reverse Repo Rate by 50 bps to 4.25%, the Deposit Facility interest rate to 3.5%, and the Lending Facility interest rate to 5%,” BI Governor Perry Warjiyo said at a press conference.

The market consensus projects that BI will raise its benchmark interest rate this month. Of the 14 institutions involved in forming the consensus, all of them agreed that MH Thamrin’s camp would raise the benchmark interest rate.

A total of 12 institutions/institutions estimate that the central bank will raise BI7DRR by 25 basis points (bps) to 4.00% while two institutions/institutions project an increase in BI7DRR by 50 bps to 4.25%.

For the record, BI surprisingly raised the benchmark interest rate by 25 bps to 3.75% in August 2022. The increase was the first since November 2018 or in 44 months.

DBS economist Radhika Rao also said BI needed to raise interest rates to maintain inflation expectations. Inflation expectations are expected to increase after the government raised subsidized fuel prices on September 2.

Indonesia’s general inflation reached 4.64% (year on year/YoY) while core inflation was recorded at 3.04% (YoY). Core inflation (YoY) was the highest since November 2019 (3.08%).

“The biggest concern right now is the continued impact of rising fuel prices on inflation. The increase in interest rates is more to maintain domestic inflation expectations and not just to follow the trend of rising global interest rates,” said Radhika in her report Macro Insights Weekly: Can the global Economy Handle Positive Real Rates?