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BI hikes interest rates to mitigate external risks
Bank Indonesia (BI) has raised its key interest rates in what it calls a “preemptive measure” in light of global risks caused by the uncertain outlook of monetary policy in the United States and geopolitical tension in the Middle East.
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Bank Indonesia Governor Perry Warjiyo answers questions from journalists following the central bank’s monthly monetary policy meeting in Jakarta on May 25, 2023. (Bank Indonesia YouTube channel/Screenshot)
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ank Indonesia (BI) has raised its key interest rates in what it calls a “preemptive measure” in light of global risks caused by the uncertain outlook for monetary policy in the United States and geopolitical tension in the Middle East.
The central bank lifted the benchmark BI Rate by 25 basis points (bps) to 6.25 percent. It also raised the rates for its deposit facility and its lending facility by the same amount to 5.50 percent and 7 percent, respectively.
Following BI’s monthly policy meeting, BI Governor Perry Warjiyo explained on Wednesday that the monetary policy authority had considered several scenarios with regard to the US Federal Reserve’s key interest rate, the federal funds rate (FFR), and global conflicts.
He said the scenarios "measure the risks and the probability” of them happening and that BI had assessed how they would affect Indonesia’s macroeconomic situation.
The most likely scenario, termed the “baseline” scenario, is seen to have a 75 percent chance of occurring, while a so-called “potential risk” scenario is deemed less likely and a “tail risk” scenario is seen as the least likely.
The baseline scenario assumes a 25-bps reduction in the FFR to take place in the fourth quarter of this year, probably in December, but under the potential risk scenario, the Fed would only cut its key rate in the first half of next year, albeit by 50 bps. The unlikely tail risk scenario assumes a mere 25 bps cut throughout the entirety of 2025.
After assessing recent macroeconomic data on inflation, job growth and retail spending, all of which veered from expectations, the Fed signaled that its restrictive monetary policy needed to be maintained longer, which analysts took to mean a cut in the FFR rate was not expected before September, if at all this year.
