The Impact of The Fed’s Interest Rate Increase on Indonesia

rupiah and us dollar
rupiah and us dollar

On Thursday (16/6/2022) morning, Indonesian time, the United States (US) central bank, the Federal Reserve (The Fed) again raised interest rates. Will the Fed’s interest rate increase have a bad impact on Indonesia?

According to market forecasts, Fed Chair Jerome Powell and colleagues are raising interest rates more aggressively than they intended last month. The Fed raised interest rates by 75 basis points to 1.5-1.75%.

Whereas last month, Powell said he would raise interest rates by 50 basis points and did not consider 75 basis points.

However, even though interest rates were raised higher, the market actually welcomed it. The Composite Stock Price Index (JCI) this morning rose more than 1%, approaching the 7,100 level again.

Then the rupiah immediately strengthened 0.2% at the opening of trading to Rp. 14,711/US$. From the bond market, government securities (SBN) are also being hunted by market players. This can be seen from the yield on 10-year government bonds, which fell 1.8 basis points to 7.417% this morning.

Signs that the Indonesian financial market will strengthen have actually been seen since last night by observing the movement of the US financial market. Wall Street strengthened, while the US dollar index and Treasury yields declined.

Markets welcomed the Fed’s move to raise interest rates aggressively.
“Obviously today’s 75 basis point hike is one of the largest and most unusual, I don’t see a movement like this as commonplace,” Fed Chair Jerome Powell was quoted as saying.

In July, Powell said he would raise interest rates again by between 50 and 75 basis points, and would always communicate this as clearly as possible.

The 75 basis point increase was the biggest since 1994, and it’s still not over. Based on the Fed Dot Plot released quarterly, the majority of members of monetary policymakers (The Fed) see interest rates at the end of the year at 3.4% or in the range of 3.25-3.5%.

The interest rate is 1.5% higher than the March edition of the Fed Dot Plot.

The Fed which shows a strong intention to reduce inflation makes the market happy. With the higher interest rates, it is hoped that inflation will decrease.

Indeed, the higher the interest rate, the higher the risk of a recession. However, a temporary recession is still better than if high inflation is ingrained which can undermine the economy in the long term.