3-2-2024 (JAKARTA) Indonesia’s central bank is considering a reduction in interest rates this year to stimulate economic growth, Governor Perry Warjiyo announced on Saturday. However, the bank is waiting for the rupiah to strengthen against the dollar before making any decisions.
Warjiyo expressed caution, stating, “If we rush while the global condition is in disequilibrium, the rupiah could weaken and inflation goes out of control.” He attributed the global economic fragmentation to this disequilibrium.
Bank Indonesia (BI) raised its key policy rate by 250 basis points from August 2022 to October 2023 to 6 per cent to maintain rupiah stability and control inflation. Warjiyo has emphasized the potential for monetary policy relaxation, possibly in the second half of the year, as global uncertainties ease and the Federal Reserve considers reducing U.S. interest rates.
Inflation in Southeast Asia’s largest economy eased further to 2.57 per cent in January, nearing the midpoint of the central bank’s target range of 1.5 per cent to 3.5 per cent for the year.
The recent volatility of the rupiah is attributed to domestic political developments preceding the Feb. 14 legislative and presidential elections, along with shifts in global sentiment for risky assets, amid speculation about the Fed’s future actions.
Warjiyo believes that monetary easing in Indonesia could support growth, particularly as the economy is in an upward growth cycle, with expectations for the cycle to peak in 2026. However, the extent and duration of BI’s easing cycle will depend on the pace of Indonesia’s economic growth, especially with an anticipated government transition.
BI forecasts economic growth between 4.7 per cent and 5.5 per cent this year, compared to last year’s outlook of 4.5 per cent to 5.3 per cent.
Regarding the possibility of reducing banks’ reserve requirement ratio (RRR) ahead of any rate cut, Warjiyo indicated that the current liquidity conditions are already loose. He suggested maintaining the RRR rates unchanged.
BI has provided some banks with RRR rates of 5 per cent, lower than the industry standard of 9 per cent, if they finance sectors crucial for economic growth, such as Indonesia’s resource downstream industry. This initiative has contributed 165 trillion rupiah ($10.5 billion) to banks’ liquidity as of the end of 2023.
