Bank Indonesia Slows Rate Hikes As Inflation Remains High

Indonesia’s central bank decided to raise its key interest rate for the fifth policy session at its December meeting, though at a slower pace than in the previous months, as inflation came off slightly from highs due to a modest easing in energy prices and the pace of economic growth is forecast to slow next year in the backdrop of a global slowdown.

The Board of Governors, headed by Perry Warjiyo, hiked the BI 7-day reverse repo rate to 5.50 percent from 5.25 percent following its two-day rate-setting session, the Bank Indonesia said on Thursday.

In November, the central bank had raised interest rates by 50 basis points.

The deposit facility rate was also raised by a quarter-point to 4.75 percent and the lending facility rate to 6.25 percent.

By raising interest rates in a measured manner, the bank aims to ensure a continued decline in inflation and inflation expectations so that core inflation is maintained within the range of 3.0 percent to 1.0 percent.

Recent data showed that Indonesia’s headline inflation eased to a three-month low of 5.42 percent from 5.71 percent. Nonetheless, the inflation was well above the target corridor of 3 plus or minus one percent.

Meanwhile, the core inflation declined further to 3.30 percent due to the continued impact of the limited fuel price adjustment on core inflation and mild inflationary pressure from demand.

The bank also said it remains focused on the Rupiah exchange rate stabilization policy, which continues to be strengthened in order to control imported inflation and mitigate the spillover effects of a strong US dollar and high market uncertainty.

Bank Indonesia observed that Indonesia’s domestic economy remains strong due to resilient domestic demand created by households’ purchasing power and strong confidence indicators.

Along with hopes of better exports and domestic demand, economic growth in 2022 is predicted to remain biased upwards within the range of Bank Indonesia’s projection of 4.5 percent to 5.3 percent in 2023.

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