This 2020 file photo shows a reflection of high rise building in Jakarta. (Antara Photo/Nova Wahyudi)

Core Inflation Dictates BI's Next Move

BY :TRIYAN PANGASTUTI

APRIL 14, 2022

Jakarta. Bank Indonesia, or BI, the country's central bank, has signaled to keep its benchmark interest rate steady at 3.5 percent, saying the fundamental domestic inflationary pressures as reflected in core inflation have yet to warrant any increase despite rising commodities prices and increasingly hawkish US Federal Reserve. 

"Regarding food or energy price pressures, BI will not respond to the first round impact," Governor Perry Warjiyo said in a press conference on Wednesday. 

"We will respond if the pressures have a fundamental impact, the indicator of which is core inflation," Perry said. 

Bank Indonesia has kept its benchmark interest rate at a record low of 3.5 percent for 15 months, intending to support recovery in Southeast Asia's largest economy. 

The central bank was also optimistic inflation would stay within its target range of 2 to 4 percent by the end of this year.  Indonesia saw its highest headline inflation in two years last month when the consumer price index (CPI) rose 2.64 percent compared to the same month a year earlier. 

Core inflation, which excludes volatile and administered prices like raw foods and fuels, also rose to 2.37 percent. 

 

Perry acknowledged geopolitical pressures have increased pressure on prices, especially for food and energy. Still, he said he kept faith in the Central Inflation Control Team (TPIP) and the Regional Inflation Control Team (TPID) to rein in the price increases. 

“The effort that can be done is to maintain food supply and improve their distribution. In addition, the government needs to keep administered prices from soaring," Perry said. 

Meanwhile, Bank Indonesia still has more tricks up its sleeve to counter the impacts of the Fed's interest rate hike. BI would first reduce liquidity by increasing banks' minimum mandatory deposit (GWM) before raising interest rates, Perry said.   

"BI's monetary policy in dealing with external conditions is first to stabilize the exchange rate, normalize liquidity, and then estimate inflation to determine the interest rates. So far, we will maintain it at 3.5 percent until there are signs of rising inflation,” he said.

Bank Indonesia expected the Fed to be more aggressive in raising interest rates following geopolitical tensions between Russia and Ukraine and rising commodity and food prices.

The Fed is predicted to raise its policy interest rate at least seven times this year. Previously, BI estimated that this year's Fed fund rate would only increase five times.

The Fed has signaled it will raise interest rates again sooner. Goldman Sachs also predicts that the Federal Reserve will raise interest rates by 50 basis points each at the meeting in May and June 2022. Last March, the Fed raised interest rates for the first time since 2018 by 25 basis points to 0.5 percent.

Perry sees that the Fed's move will impact Indonesia, particularly concerning foreign capital flows. This is because investors tend to choose safe assets.

To minimize the negative impact of the Fed's policy, it is necessary to adjust the yield of Government Securities (SBN), stabilize the rupiah exchange rate, and the adequacy of reserve reserves. 

"If the US Treasury increases, there will be pressure on domestic SBN yields to increase by the market mechanism. And this adjustment or adjustment of SBN yields is coordinated with the Ministry of Finance and BI. There is an increase, but the increase is reasonable and still attracts foreign capital inflows," he said. 

 

 

SHARE


RECOMMENDED STORIES