Indonesia central bank expected to raise benchmark interest rate in departure from populist stance

Bank Indonesia will hold its routine interest rate meeting on May 24. PHOTO: REUTERS

JAKARTA - Indonesia's central bank is expected to raise interest rates later this month after the United States Federal Reserve raised its benchmark rate significantly last week to curb surging inflation.

Bank Indonesia, which drew flak from some observers after maintaining its benchmark rate in April at 3.5 per cent in a move some saw as populist, will hold its routine interest rate meeting on May 24.

Annual inflation shot up in April, with the consumer price index rising 3.47 per cent from a year earlier to the highest rate since August 2019, Indonesia's national statistics agency (BPS) announced on Monday (May 9). This figure is near the upper range of the central bank's 2 to 4 per cent inflation target.

Last Wednesday, the US Fed raised its key interest rate by 50 basis points, the largest increment in the past 22 years, fuelling worries that efforts to tame inflation would likely cause a global recession at a time when most countries are still reeling from the lingering economic impact of the pandemic.

Consumer prices in the US surged by 8.5 per cent in March year on year, the quickest pace since 1981, fuelled by a 32 per cent jump in energy costs on the back of the war in Ukraine. Continued Covid-19 strict restrictions in China, a main producer of raw materials for factories around the globe, have further complicated matters.

Stock markets around the world, including Indonesia, turned red following the Fed's interest rate increase.

A former trade minister told The Straits Times that Bank Indonesia should have raised the benchmark interest rate in the April monthly meeting, rather than being populist at the expense of the country being behind the curve today.

Raising Indonesia's benchmark interest rate would translate to higher mortgage payments, companies paying higher financing costs, and further hurt the country's stock market, while not raising it could fuel fears about potential depreciation of the rupiah against the US dollar, which may in turn lead to capital outflows.

"Bank Indonesia continues to monitor inflation risks going forward, and the magnitude and timing of our monetary policy response will depend on the factors causing the inflation," central bank deputy governor Dody Budi Waluyo said on Wednesday (May 11).

His statement also added that the central bank will also conduct various measures to curb inflation, including strengthening relations with stakeholders, including the government. Bank Indonesia has previously been involved in efforts to stabilise the price of staple foods such as rice by sponsoring the instalment of electronic screens at traditional markets to improve price transparency to stymie perfidious mark-ups by traders.

Rising food and transportation costs led to inflation, according to a research note by investment bank Mandiri Sekuritas' chief economist Leo Putera Rinaldy and economist Imanuel Reinaldo.

"Food prices recorded the largest contribution to the total monthly inflation. This was followed by the contribution from higher transportation prices due to the direct impact of the fuel price hike and seasonal Hari Raya, especially from airfare," they noted yesterday.

While Bank Indonesia is widely expected by economists and experts to raise its interest rate, some Indonesians on the ground hope otherwise.

Jakarta resident Feri Husin, 50, for one, expects another reprieve from an interest rate hike, arguing that Indonesia's inflation rate, unlike many other countries, has been stable and the nation's ample natural resources would buffer it from massive energy cost spikes that have hit other countries.

Indonesia recorded an inflation of 1.87 per cent in 2021 and 1.68 per cent in 2020.

"Higher Bank Indonesia's benchmark rate means higher mortgage monthly instalments. That's the last thing we want to see at a time when we need strong consumer spending to boost the economy as we recover from the pandemic downturn," Mr Feri, who works in a bank, said.

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