BI Raises Reference Interest Rate to 6.25 Percent

"This interest rate increase is to strengthen the stability of the rupiah exchange rate against the possibility of worsening global risks and as a pre-emptive and forward looking step to ensure inflation remains within the target of 2.5 percent," plus-minus 1 percent in 2024 and 2025, in line with stand monetary policy which is pro-stability," said Perry.

Bank Indonesia has set the benchmark interest rate at 6 percent in a meeting of the Bank Indonesia Governor's Board in late October 2023. Therefore, the interest rate of 6 percent will remain unchanged for five months before BI raises it to 6.25 percent.

Meanwhile, regarding macroprudential policies and payment systems, according to Perry, the central bank remains in a position to promote sustainable economic growth. "Loose macroprudential policies continue to be pursued to encourage bank financing credits for businesses and households," he said.

Regarding the payment system policy, Perry continued, it is aimed at strengthening the reliability of the payment system infrastructure and industry structure. This is also to expand the acceptance of payment system digitalization.

The increase in the benchmark interest rate is unexpected by a number of economists. As previously reported, Bank Permata's Chief Economist Josua Pardede and Senior Economist and Associate Faculty of the Indonesian Banking Development Institute Ryan Kiryanto separately hoped that BI would maintain the benchmark interest rate at 6 percent.

"For the BI Board of Governors Meeting in April 2024, we see that BI will tend to maintain the BI Rate at the level of 6 percent," said Josua. "In the interest of continuing economic and monetary stabilization efforts in the country, namely controlled inflation and stability of the rupiah exchange rate, the best option available is maintaining the BI Rate," said Ryan on Tuesday (23/4/2024).

The increase in the benchmark interest rate by BI is related to the dynamics of global financial markets which have become increasingly volatile in recent times. This is mainly influenced by the Fed's signals.

In recent occasions, officials from the US central bank have signaled that The Fed will delay the reduction of the benchmark interest rate from its initial plan. This has pushed for a strengthening of the US dollar against other currencies, including the rupiah.

For the past seven trading days, the rupiah has consistently fluctuated above Rp 16,000 per US dollar. Referring to data from the Jakarta Interbank Spot Dollar (Jisdor) at the market close on Wednesday (24/4/2024), the exchange rate of the rupiah was at Rp 16,161 per US dollar.

The day before, the rupiah closed weaker at the level of Rp 16,244 per US dollar, or a depreciation of 20 basis points compared to the previous day's closing.

Citing CNBC, Wells Fargo Securities predicts that the exchange rate of the rupiah will reach Rp 16,500 per US dollar due to The Fed's delay in lowering interest rates. Strategy experts at Brown Brothers Harriman & Co even project that the rupiah's exchange rate will reach Rp 17,000 per US dollar by September 2024.