Bank Indonesia raises interest rates for first time in three years

Indonesia’s central bank raised rates today (August 23) for the first time since 2018, after inflation reached its highest level in nearly seven years.

Bank Indonesia’s six-person board of governors raised the seven-day reverse repo rate by 25 basis points to 3.75%. It also hiked the deposit and lending rates by 25bp to 3% and 4.5% respectively. The last time the central bank raised policy rates was in November 2018.

Most analysts polled by Bloomberg had predicted Bank Indonesia to keep its seven-day reverse repo rate unchanged. BI governor Perry Warjiyo said last week that it was not necessary to raise rates just yet, according to media reports.

The central bank said in a statement the rate hike was “a pre-emptive and forward-looking step” to mitigate the risk of rising core inflation and inflation expectations. It noted non-subsidised fuel and food prices were rising.

Year-on-year consumer price index inflation in the country rose from 4.35% in June to 4.94% in July – the highest level since October 2015. Core inflation, which excludes changes in energy and food prices, remained relatively low at 2.86% year on year in July.

Bank Indonesia said it expects headline and core inflation to increase, adding that inflation in 2022 and 2023 is at risk of exceeding its 2–4% target.

The central bank said the rate hike is also aimed at strengthening the rupiah exchange rate amid high volatility in the financial markets.

The rupiah has fallen by around 4.2% against the US dollar since the end of last year. But the depreciation was still milder than that of currencies of some neighbouring economies. India’s currency fell around 6.9% against the dollar in the same period, while Malaysia’s fell by 7.1%, and Thailand’s by 7.3%.

Bank Indonesia said it will continue to stabilise the rupiah exchange rate by intervening in the foreign exchange market, and buying or selling government securities in the secondary market.

Indonesia’s GDP growth accelerated to 5.44% year on year in the second quarter, from 5.01% in the first quarter. The strong growth was driven by increased domestic demand and strong export performance, the central bank said. It maintained its GDP growth estimate for this year to be within 4.5–5.3%.