Response to BI Rate Increase, Stimulus Needed

Fiscal policy stimulus is needed for sectors affected by the increase in the benchmark interest rate.

Bank Indonesia Governor Perry Warjiyo answered journalists' questions at the press conference resulting from the Bank Indonesia Board of Governors Meeting in Jakarta, Wednesday (20/3/2024).

JAKARTA, KOMPAS — Bank Indonesia's decision to raise its benchmark interest rate to 6.25 percent, Wednesday (24/4/2024), has the potential to put pressure on the rate of national economic growth. Therefore, the government may be able to provide stimulus to the real sector which is sensitive to reference interest rates.

The decision by BI to raise the benchmark interest rate was taken after they maintained the benchmark interest rate at 6 percent for five consecutive months since its last increase of 25 bps in October 2023.

This policy was taken by taking into account the potential risk factors of global uncertainty in line with expectations of a delay in cuts to the United States central bank, The Federal Reserve (The Fed), and heating geopolitical tensions in the Middle East. As a result, portfolio investors flocked to move their capital towards more liquid (safe heaven) financial instruments, such as the US dollar and gold.

Also read: BI Raises Reference Interest Rate to 6.25 Percent

Senior Economist of PT Samuel Sekuritas Indonesia, Fithra Faisal Hastiadi, believes that the increase of BI Rate will have an impact on the national economy. In other words, the projection of national economic growth of 5 percent will not be achieved and is estimated to be around 4.8 percent.

"The government has to be realistic now. Which one should be prioritized first, economic growth or stability? Both cannot be done," he said when contacted from Jakarta on Wednesday (24/4/2024).

TANGKAPAN LAYAR

Bank Indonesia Governor Perry Warjiyo explained the results of the Bank Indonesia Board of Governors Meeting in an online press conference, Wednesday (24/4/2024).

This condition is like the concept of the international economic trilemma (immposibletrinity), which states that it is impossible for a country to implement policies of exchange rate stability, openness of capital flows and independent monetary policy simultaneously. However, in this case, the three policies are economic growth, rupiah stability and low interest rates.

According to Fithra, monetary policy in the form of interest rates aimed at maintaining the stability of the rupiah exchange rate will sacrifice economic growth. On the other hand, economic growth with low interest rates will not achieve stability.

Therefore, if Indonesia targets long-term economic growth, stability must be the main foundation. If stability is not maintained, the growth base will be fragile.

From these things, the BI Rate actually does not need to be raised. However, perhaps BI has long-term considerations. Nobody knows the future geopolitical conflicts and economic conditions of the United States.

In order to maintain the growth momentum, according to Fithra, the government needs to identify which sectors will be impacted or sensitive to the increase of reference interest rates, especially the real sector. Some of these sectors include infrastructure, automotive sales, and retail.

"A counter policy is needed from the fiscal side when there is a monetary policy like this. "The MSME sector (micro, small and medium enterprises), for example, should not let this increase in interest rates cause payment defaults to increase so that the NPL banking ratio also increases," he said.

Also read: Get Ready for a High Cost Economy in 2024

Long term considerations

The lecturer at the Faculty of Economics and Business, University of Indonesia, added that the weakening of the rupiah over recent times can indeed have an impact on various lines, especially inflation due to imports (imported inflation), which in turn also harms the economy. However, efforts to maintain the stability of the rupiah exchange rate are not only achieved by increasing the benchmark interest rate.

Several factors that are considered not to increase the BI Rate include the easing of geopolitical conflict tensions in the Middle East and the weakening of the US dollar index against major currencies (DXY) as US purchasing manager index (PMI) data falls. From the domestic side, the trade balance again recorded a surplus which was even above expectations.

Also read: Rupiah Reaches IDR 16,240, Two Monetary Policy Options Open

Furthermore, as of March 2024, the foreign exchange reserves recorded 140.4 billion US dollars, which is still above the international standard threshold. Therefore, the central bank still has adequate intervention resources to stabilize the exchange rate of the rupiah.

"From those things, actually, there is no need to raise the BI Rate. However, perhaps BI has long-term considerations. No one knows the geopolitical conflicts and economic conditions of the United States in the future. Therefore, BI anticipates various potential risks," said Fithra.

In the long term, the increase in BI Rate can also be a precautionary measure against the potential widening of current account deficit by the end of 2024. BI estimates that the current account will experience a deficit of 0.1-0.9 percent in 2024.

Also read: Entrepreneurs Value BI's Decision to Increase Interest Rates as Not Ideal

Banks remain alert

Since the BI Rate has remained at 6 percent, the banking industry has been asked to continue to pay attention to domestic economic conditions, such as the rate of inflation, economic growth, political stability and expectations of future interest rates. In this case, the Financial Services Authority (OJK) is involved in ensuring that banking liquidity is adequate and able to mitigate potential risks amidst conditions that are higher for longer.

Chief Executive of OJK Banking Supervision Dian Ediana Rae said the banking industry must be alert to market risks related to exchange rates and interest rates. The strengthening of the US dollar and the potential increase in yields on government securities (SBN) could have an impact on bank portfolios.

"The increase in BI interest rates since July 2022 has pushed up the interest rates of third-party funds (DPK) in banks. If BI raises the BI Rate again, banks will slowly adjust their DPK and credit interest rates. Banks will certainly consider liquidity conditions and future credit demand," he said when contacted from Jakarta.

In line with the continuous growth of credits, the additional liquidity from KLM is predicted to reach IDR 115 trillion by the end of 2024, bringing the total incentives given to IDR 280 trillion.

Dian assesses that the banking industry's liquidity conditions are still quite adequate, seen from the ratio of credit distribution compared to public funds and bank capital (loan to deposit ratio/LDR). OJK noted that banking LDR in February 2024 was 84.05 percent and in surging economic conditions LDR could reach 92 to 94 percent.

The availability of liquidity is also reflected in a high liquid instrument ratio to third-party funds (AL/DPK) of 27.18 percent with annual DPK growth as of March 2024 at 7.44 percent. On the other hand, credit disbursed in the first quarter of 2024 also grew by 12.4 percent annually, driven by credit growth in almost all sectors of the economy.

Based on user groups, credit growth is supported by investment credit, working capital credit, and consumer credit, each growing annually by 14.83 percent, 12.30 percent, and 10.22 percent respectively. With this development, credit growth is predicted to continue to increase in 2024 and be in the range of 10-12 percent.

TANGKAPAN LAYAR

Executive Head of Banking Supervision at Financial Services Authority (OJK), Dian Ediana Rae, explained the development of the banking sector during the OJK Monthly Commissioner Meeting in March 2024, held online on Tuesday (2/4/2024).

However, continued Dian, the banking industry is still required to increase its resilience by strengthening capital and maintaining adequate coverage for Impairment Losses (CKPN). Furthermore, banks should routinely carry out stress tests to measure their capital in facing potential risks.

Also read: Various Industrial Sectors Under Pressure from Rupiah Depreciation

BI Efforts

Even though monetary policy aims at stability (pro stability), BI also implements macroprudential policies and a payment system that supports economic growth (pro growth). One of them is through the Macroprudential Liquidity Incentive Policy (KLM).

BI Governor Perry Warjiyo explained that the strengthening of KLM is carried out by optimizing available liquidity incentives and expanding the coverage of priority sectors that contribute greatly to national economic growth. The strengthening of KLM is directed to immediately provide an additional banking liquidity incentive of IDR 81 trillion, bringing the total incentive to IDR 246 trillion.

"Along with the continuous growth of credit, additional liquidity from KLM is predicted to reach Rp 115 trillion at the end of 2024, bringing the total incentives provided to Rp 280 trillion. BI will continue to strengthen the effectiveness of accommodating macroprudential policies in synergy with government policies, KSSK, banks, and business actors," he said in a virtual press conference of the April 2024 RDG results on Wednesday (24/4/2024)."

KOMPAS/ADRYAN YOGA PARAMADWYA

Governor of Bank Indonesia Perry Warjiyo (center) along with Senior Deputy Governor Destry Damayanti (second from left) and Deputy Governors Aida S. Budiman, Doni P. Joewono, and Filianingsih Hendarta (from left to right) prepare to leave the room after a press conference announcing the results of the Bank Indonesia Governor's Meeting in Jakarta on Wednesday (20/3/2024).

In addition, BI is also pursuing a policy of stabilizing the rupiah exchange rate by optimizing all available monetary instruments, both through spot and DNDF intervention in the foreign exchange market and purchasing SBN from the secondary market. On the other hand, there are also instruments to encourage the inflow of foreign portfolio capital, namely BI Rupiah Securities (SRBI), BI Foreign Currency Securities (SVBI), and BI Foreign Currency Sukuk (SUVBI).

As of April 23 2024, the positions of the SRBI, SVBI and SUVBI instruments were recorded at IDR 393.66 trillion each; 1.89 billion US dollars; and 334 million US dollars. The issuance of SRBI, for example, has attracted foreign portfolio flows into the country which is reflected in non-resident holdings of IDR 71.55 trillion or 18.18 percent of the total outstanding.

"BI (Bank of Indonesia) also continues to strengthen coordination with the government, banks, and business world to support the implementation of the Foreign Exchange Placement Instrument for Natural Resource Export Earnings (DHE SDA) in line with Government Regulation 36 of 2023 regarding DHE," he said.

Also read: BI Faces Interest Rate Policy Dilemma