Reference Interest and Stimulus Needs

BI is in a dilemma because an increase in the benchmark interest rate is like a double-edged sword: on the one hand it can help strengthen the exchange rate, but on the other hand it will put a brake on the rate of economic growth. Long-term economic considerations and the stance of BI's pro-stability monetary policy made BI choose the option of increasing the BI Rate to reduce exchange rate volatility amidst increasing global risks.

Also read: BI Interest Rates Rise, Bank Credit Distribution Risks Slowing

The weakening of the rupiah is mainly caused by The Fed's decision to hold the benchmark interest rate, triggering a global capital flow back to the US and causing many world currencies to plummet. Previously, The Fed signaled that it would still lower the benchmark interest rate three times this year in line with controlled inflation in the US. The global economic consensus suggests that the execution may only be done in September. During this time, pressure on the rupiah will still occur. Prolonged weakening of the rupiah will hit the domestic economy.

However, besides preventing the outflow of funds, the increase in BI's benchmark interest rate will also push up the credit interest rate, which will ultimately be transmitted to the real sector and economic growth. Moreover, there are concerns that without stimulus, growth could be below 5 percent this year.

The importance of the policy of raising the benchmark interest rate is also accompanied by fiscal and non-fiscal stimulus or incentives to reduce its impact on the real sector.

Also read: US Economic Data Makes JCI Suddenly Collapse

The stimulus can take the form of policies to address the burden of increased costs due to rising interest rates, tax incentives, or reductions in barriers to importing raw materials and aids. The potential for increased defaults and SMEs' bad loans due to rising credit interest rates should also be anticipated. Fiscal policies for social cushioning of affected communities may also be necessary to maintain purchasing power.

Amid global uncertainty, stabilizing exchange rates through increasing benchmark interest rates and various monetary instruments from the central bank alone may not be enough. Coordination between monetary, fiscal, financial, and real sector policies is important in maintaining macro stability, including inflation, the value of the rupiah, and economic growth.

This exchange rate pressure is basically an implication of the still strong economic hegemony of the US dollar and our open economic system. Here the importance of the IMF's warning to focus on the fundamentals of the domestic economy. Preventing double deficits, namely the fiscal and current account balances, is one of the keys to maintaining the rupiah. No less important, reducing dependence on the use of US dollars. Deepening money markets and the use of local currencies in cross-border transactions are important here.