BI Estimates There is No Urgency to Increase the Reference Interest Rate Again

The Governor of Bank Indonesia Perry Warjiyo explained that decisions regarding the direction of the benchmark interest rate (BI Rate) policy take into account estimates of inflation, economic growth and the rupiah exchange rate in the future. With the latest data developments, there is no longer a need to increase the BI Rate.

“Everything is data dependent. "With current data, we see that the increase in the BI Rate and SRBI (Bank Indonesia Rupiah Securities) is sufficient to ensure strengthening the stability of the value of the rupiah, ensuring inflow (portfolio investment flow), and also ensuring inflation," he said in a media briefing at the BI Central Building, Jakarta, Wednesday (8/5/2024).

Also read: BI Raises Reference Interest Rate to 6.25 Percent

Foreign capital comes in

Perry assessed that Bank Indonesia's decision to raise the benchmark interest rate to 6.25 percent was also well received by the market and investors. This was reflected in the re-entry of foreign portfolio investments during the first two weeks of May 2024.

During that period, the total inflow of foreign capital into the domestic financial market reached Rp 22.84 trillion. This amount consists of net purchases in the State Securities market worth Rp 8.1 trillion, net purchases in the Corporate Bonds market worth Rp 19.77 trillion, as well as net sales in the stock market worth Rp 5.03 trillion.

There are at least three factors that cause foreign capital to flow back in, namely differential yields, risk premiums and economic prospects. By increasing the benchmark interest rate, government SBN yields become more attractive, thereby encouraging foreign capital inflow.

The total flow of foreign capital entering the domestic financial market reached IDR 22.84 trillion.

Furthermore, the influx of foreign capital also helped strengthen the exchange rate of the rupiah towards the tendency of reaching the level of Rp 16,000 per US dollar. Compared to before the increase in the BI Rate, the rupiah at that time was nearly approaching the level of Rp 16,300 per US dollar.

"The exchange rate is expected to strengthen faster than our previous estimates. We will also strive to ensure that the rupiah exchange rate falls below Rp 16,000 to the US dollar," said Perry.

He added that the current global economic development is also better than previously predicted, including the direction of the US central bank's benchmark interest rate policy, which is likely to decrease once in December 2023. Additionally, the movement of the US dollar index against major currencies and the decline in US government bond yields indicate a decrease.

Rupiah Exchange Rate against US Dollar

On the other hand, the domestic economic development shows positive progress. This is demonstrated by the achievement of economic growth in the first quarter of 2024, which reached 5.11 percent annually and is expected to remain above 5 percent, as well as the controlled inflation rate in April 2024, which was 3 percent annually.

"Overall, inflation in 2024 and 2025 will be maintained within target. "Our estimate is that the Consumer Price Index at the end of the year will also fall by a maximum of 3.2 percent, and core inflation 2.6 percent," said Perry.

Also read: The Fed Maintains Interest Rates, Rupiah Strengthens Slightly

Potential upside

The position of foreign exchange reserves at the end of April 2024 amounted to 136.2 billion US dollars, down from the position at the end of March 2024 which was 140.4 billion US dollars. This decline is influenced, among other things, by the payment of government foreign debt and the stabilization of the exchange rate of the rupiah in line with the increasing uncertainty of the global financial market.

The foreign exchange reserve position is equivalent to financing 6.1 months of imports or 6.0 months of imports and the government's foreign debt payments. This foreign exchange reserve amount also exceeds international adequacy standards of around 3 months of imports.

According to Perry, the inflow of foreign capital, exchange rate stability, as well as a large trade balance surplus can increase foreign exchange reserves. He also ensures that the amount of foreign exchange reserves is more than sufficient and will increase even with the increase in corporate demand and dividend distribution.

We will also strive for the rupiah exchange rate to fall below IDR 16,000 per US dollar.

Separately, Senior Economist at PT Samuel Sekuritas Indonesia, Fithra Faisal Hastiadi, explained that the foreign exchange reserves figure is lower than the previously estimated amount of 138 billion US dollars. The foreign exchange reserves are now at the lowest level since October 2023. This indicates significant intervention from the central bank influenced by the government's foreign debt payment and steps to stabilize the rupiah amidst increasing uncertainty in the global financial market.

"The high BI benchmark interest rate in April 2024 is likely a response to the high cost of rupiah intervention. Our calculations show that monthly intervention must remain below 2 billion US dollars to maintain investor confidence," he said when contacted from Jakarta.

Also read: Rupiah Reaches IDR 16,240, Two Monetary Policy Options Open

Although it has decreased by 4.2 billion US dollars, Faisal continued, BI can still rely on foreign exchange reserves for market intervention. In 2022, intervention to stabilize the rupiah without raising interest rates has depleted foreign exchange reserves by 10 billion-12 billion US dollars over six months.

The Lecturer from the Faculty of Economics and Business at the University of Indonesia added that coordination between the Central Bank and the Government will aid in improving foreign exchange reserves in the future, even though there will be challenges for the Rupiah in May 2024 due to the repatriation of dividends. Furthermore, economic stability and prospects for future economic growth also support strengthening foreign exchange reserves.

"However, we see a high possibility of a 25 bps increase in the BI Rate to 6.5 percent this year, possibly in early June, to prevent further depletion of foreign exchange reserves due to obligations to fulfill export earnings in foreign currency," he said.