BI Governor Perry Warjiyo said this decision was taken at the BI Board of Governors Meeting held on September 21-22. In addition to the BI Rate, his party also decided to increase the deposit facility interest rate by 50 bps to 3.5 percent, and the lending facility rate to increase 50 bps to five percent.
“The decision to increase the interest rate as a step front loaded, preemptive dan forward looking to lower inflation expectations and ensure core inflation returns to the target of three percent, plus minus one percent, in the second half of 2023,” said Perry.
The decision, said Perry, was also made to strengthen the rupiah exchange rate stabilization policy so that it is in line with the fundamental value, due to the high uncertainty in global financial markets, in the midst of increasing demand for the domestic economy which remains strong.
BI, said Perry, also continued to strengthen the policy mix response to maintain stability and momentum for the national economic recovery with several policy mixes, including firstly, strengthening monetary operations by increasing the interest rate structure on the money market in line with the BI 7-Day Reverse Repo rate hike. Rate to lower inflation expectations and ensure core inflation returns to its target in the second half of 2023.
Second, strengthening the stabilization of the rupiah exchange rate as part of controlling inflation, by intervening in the foreign exchange market, either through spot transactions, domestic non delivery forwardas well as the purchase and sale of National Securities (SBN) in the secondary market.
“Thirdly, continuing the sale and purchase of SBN in the secondary market or what is often called operation trust to strengthen the stabilization of the rupiah exchange rate by increasing the attractiveness of yields on SBN for the entry of foreign portfolio investment through an increase in yield Short-term SBN in line with rising interest rates BI 7-Day Reverse Repo Rate and an increase in the structure of lower long-term SBN yields considering that inflationary pressures are more short-term and will reduce the target again in the second half of next year,” he explained.
Increased Community Burden
CELIOS economist Bhima Yudhistira believes that the increase in the BI Rate will increase the burden on the community. The community has to pay a much higher cost of living after the increase in subsidized fuel prices and food prices due to inflation, even though income has not been able to recover like the COVID-19 pre-pandemic.
“In terms of the reference interest rate, it creates an increase in loan interest rates which increasingly urges people to pay much more expensive installments, both for consumer loans, such as loans for mortgages, and this will threaten a lot of young people, having difficulty paying off mortgages through this scheme. KPR,” said Bhima to VOA.
He added that income would not be able to offset the increase in house prices accompanied by an increase in mortgage loan interest due to floating rate which is getting higher. Motor vehicle loans will also decline due to rising fuel prices and interest for motorcycle leasing so that it will reduce public interest in taking motor vehicle loans not only this year, but in the years to come. Of course, said Bhima, this will hit automotive manufacturers.
The current condition, said Bhima, is indeed a dilemma. If BI does not raise the benchmark interest rate, the weakening effect of the rupiah exchange rate will actually cause imported inflation, which will increase the burden of inflation after the increase in subsidized fuel prices.
“So BI’s decision is correct, even in the future BI estimates will increase another 50 basis points. The community certainly gets an additional burden from the increase in loan interest. But BI has to choose whether it wants securities to IDR 16,000 per US dollar, for example, if BI holds the benchmark interest rate or the benchmark interest rate rises, the credit will weaken. It’s a dilemma indeed, but BI must be firm. And on the fiscal side, the government needs to help deal with the excesses of increasing the cost of financing for business actors with capital assistance, such as expanding recipients and increasing the KUR ceiling,” he concluded. [gi/ka]