Rupiah Strengthens, BI Rate Remains at 6.5 Percent
The rupiah exchange rate has continued to strengthen this week, reaching a level of IDR 15,400 per US dollar. This has led many parties to hope that Bank Indonesia (BI) will reduce the benchmark BI Rate, which currently stands at 6.25 percent.
With a lower BI Rate, liquidity in the money market is expected to increase, and interest rates should decrease. This would then encourage a drop in credit interest rates, stimulating investment and the overall economy.
The Financial Services Authority (OJK) has explained that the rise in banking funding costs can be seen in higher interest rates for third-party funds, following the previous BI Rate hike and rupiah depreciation.
However, BI has not yet fulfilled this expectation. In its Board of Governors meeting on August 20-21, 2024, BI decided to maintain the BI Rate at 6.25 percent, as well as the deposit facility interest at 5.50 percent and the lending facility interest at 7.00 percent.
BI stated that this decision aligns with its focus on monetary policy stability, in order to further strengthen the rupiah exchange rate. It also represents preemptive and forward-looking steps to ensure inflation remains within the 2.5 ± 1 percent target range.
To balance this, BI affirmed that macroprudential policies and the payment system will remain pro-growth, to support sustainable economic expansion. Loose macroprudential policies will continue to be pursued, encouraging banking credit and financing for businesses and households, while still maintaining prudent practices.
BI acknowledged that global financial markets are starting to ease, but risks remain elevated. The global economy in 2024 is estimated to grow 3.2 percent, with a tendency to slow down. The US economy is predicted to start slowing in the second half of 2024, as domestic demand declines, while the Chinese economy is not yet strong but the European economy is improving.
Also Read: The Rupiah Strengthened to Below Rp16,000 per US Dollar USD
The slowdown in the US economy has resulted in weakening inflation and faster-than-expected declines towards the long-term 2 percent target. This has fueled strong expectations for a quicker and larger reduction in the US Federal Reserve's benchmark interest rate, the Fed Funds Rate (FFR).
These developments have led to a decline in the yields of both 2-year and 10-year US Treasury bonds, as well as a weakening of the US dollar against various world currencies. This has increased the inflow of foreign capital and strengthened the currencies of developing countries, including Indonesia.
However, BI cautioned that risks related to concerns about a US recession and geopolitical dynamics need to be carefully monitored. This condition requires a cautious approach in formulating policy responses, given the potential impact of global trade on the domestic economy.
