Bank Indonesia Raises Its Key Interest Rate to 6.00% to Support the Rupiah Rate
In line with our projection, the central bank of Indonesia (Bank Indonesia) decided to raise its benchmark interest rate by 25 basis points (bps) to 6.00 percent after its October 2023 monetary policy meeting (held on 18-19 October 2023). Meanwhile, it also raised its deposit facility and lending facility by 25 bps, each, to 5.25 percent and 6.75 percent, respectively.
In a statement, Bank Indonesia expressed that the decision was made to support the rupiah rate amid heightening global uncertainty, and as a pre-emptive and forward-looking measure to mitigate the impact of imported inflation, thus bringing inflation under control and keep it within its 2.0–4.0 percent year-on-year (y/y) target range for 2023 and 1.5–3.5 percent (y/y) target range for 2024.
There is a wide range of factors that are currently causing global uncertainty, most notably: Israel-Hamas war, Russo-Ukrainian war, the hawkish Federal Reserve, high US Treasury yields, and subdued global economic growth. And Indonesia, which is typically considered as one of the more fragile emerging markets, is usually among the first to be affected by capital outflows as market participants seek safe havens.
For example, based on Bank Indonesia data, there was a net portfolio outflow of USD $2.1 billion in the third quarter of 2023. Moreover, these capital outflows continued into October 2023. Bank Indonesia also noted that between 16 and 19 October 2023, a total net foreign outflow of IDR 5.36 trillion (approx. USD $340 million) occurred, consisting of IDR 3.45 trillion worth of government securities (known as SBNs) and IDR 3.01 trillion worth of stocks. On the other hand, a total of IDR 1.10 trillion came in through the recently introduced Bank Indonesia Rupiah Securities (SRBIs).
These capital outflows pushed the Indonesian rupiah nearly to IDR 16,000 per US dollar in late-October 2023. The rupiah started October on the level of IDR 15,450 per US dollar, and ended the month at IDR 15,880 per US dollar, and thus it lost 2.8 percent of its value against the greenback.
Bank Indonesia engages in various programs to support the rupiah, such as using its foreign exchange reserves, the SRBIs, encouraging exporters to store their foreign exchange earnings at national banks, the purchase of SBNs, and the latest interest rate hike.
While a higher interest rate environment is helpful to support the currency as well as to combat inflation, the downside is of course that rising borrowing costs tend to undermine economic activity, hence economic growth is undermined accordingly. That is why Bank Indonesia also came with a couple of measures in an effort to boost credit growth to priority sectors (giving banks more liquidity to disburse credit and maintaining loose down payment rules in the automotive and property sectors).
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