Bank Indonesia Anticipates Ripple Effects from Successive Interest Rate Hikes by The Fed

Benchmark Interest Rates

Deputy Governor Senior of Bank Indonesia (BI), Destry Damayanti, has expressed the institution’s anticipation of the ripple effects that may arise from the Federal Reserve’s (The Fed) decision to raise the benchmark interest rate in July and August 2023.

Destry emphasized the increasing uncertainty in the current global economic landscape, with BI’s projection indicating that the global economy is expected to grow by only 2.7 percent this year, significantly slower than the previous year’s growth rate of 3.4 percent.

Destry highlighted the economic slowdown that is particularly prevalent in the United States (US), Europe, and China, where inflation pressures persist at relatively high levels, and labor markets remain relatively tight.

Consequently, she anticipated that benchmark interest rates in the US and Europe would sustain their higher levels for a longer duration, a concept referred to as “higher for longer.”

“In fact, it is expected that there will be one to two additional increases in the FFR (Fed Funds Rate or interest rate) in July and August,” stated Destry during a joint working meeting with the Budget Committee of the Indonesian Parliament on Monday (10/7/2023).

Furthermore, Destry remarked that the economic recovery in China fell short of previous expectations. These economic conditions are expected to exert a considerable impact on the financial systems, including the exchange rates of numerous emerging market countries, including Indonesia.

“Given these economic conditions, the DXY (dollar index) is projected to continue its upward trend, thereby exerting pressure on the exchange rates of other currencies, particularly those of emerging markets, including Indonesia,” explained Destry.

To mitigate the risks arising from the global economic ripple effects on external resilience in developing countries, including Indonesia, Destry emphasized the necessity of policy responses. Bank Indonesia has outlined several measures to address this situation comprehensively.

Firstly, the institution will intervene in the foreign exchange market through spot transactions, domestic non-deliverable forwards (DNDF), and the purchase of government securities (SBN) in the secondary market. These interventions aim to stabilize and manage exchange rate fluctuations effectively.

Secondly, Bank Indonesia will continue to implement the twist operation policy, which involves the sale of short-term government securities (SBN) in the secondary market. This strategy is expected to enhance the attractiveness of SBN and maintain investor interest in SBN portfolios.

In addition, Bank Indonesia will optimize foreign exchange operation instruments for export earnings (DHE). Specifically, foreign exchange term deposits (TD) will be utilized as a placement instrument for export earnings through banks to Bank Indonesia. This measure aims to support the stability of the country’s foreign exchange reserves.

Furthermore, Bank Indonesia will sustain its loose macroprudential policy, which will be aligned with comprehensive policy packages. This approach seeks to ensure the stability of the financial system, support economic growth, and mitigate risks associated with external uncertainties.

Lastly, Bank Indonesia will strengthen policy coordination with the central and regional governments, as well as strategic partners. This collaboration aims to foster a cohesive and synergistic approach to managing inflation control measures and supporting national economic growth.