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Indonesia interest rate rise: BI vows ‘preemptive, front-loaded’ approach to support rupiah, check inflation

By Fitri Wulandari

Edited by Valerie Medleva

13:13, 17 November 2022

Building of Bank Indonesia
On 17 November, Bank Indonesia hiked the policy rate BI 7-Day (Reverse) Repo Rate to 5.25% – Source: Mezario / Shutterstock

Bank Indonesia, the central bank of Indonesia, hiked the policy rate BI 7-Day (Reverse) Repo Rate by 50 basis point (bps) to 5.25% on 17 November. The decision was in line with market expectations as the depreciating rupiah (INR) forced the central bank to keep the so-called “preemptive and front-loaded” approach. 

Will Indonesia's interest rate rise continue beyond 2023? 

We take a closer look at the nation’s interest rate history and factors that determine BI’s hawkish stance.

What are interest rates and how does Bank Indonesia set them?

An interest rate is a fee or cost charged for borrowing money. It is also the revenue that a customer receives when they save their money in a bank. In monetary policy, interest rates are a fee paid to commercial banks that hold money at a central  bank. 

The Bank Indonesia (BI), Indonesia’s central bank, sets the Bank Indonesia 7-Day (Reverse) Repo Rate (BI 7-Day RRR) as its policy rate to keep inflation in check. BI 7-Day RRR is the interest rate paid by Bank Indonesia to the nation’s commercial banks for lending their money by buying the rupiah (IDR) denominated securities, Bank Indonesia Certificate (SBI).

As referred to by its name, banks can draw down their money after seven days, and its multiple days (14 days, 21 days, etc), including the interest. 

The BI 7-day RRR was introduced in 2016 to replace the BI Rate which had a 12 month tenor. A shorter tenor, which typically carries a higher interest rate than a longer tenor, is expected to attract more commercial banks to deposit their money at BI.

The Board of Governors of Bank Indonesia meets at least once a month to determine general monetary policies. The board is made up of the BI governor, the senior deputy governor and 4-7 deputies.

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Indonesia interest rate history: background check

The central bank of Indonesia lowered the BI 7-day RRR by 25 bps to 4.75% in February 2020 from 5% in January amid the onset of Covid-19 pandemic. The cut was aimed as a preemptive measure to maintain domestic economic growth amid the prospect of stalling global economic recovery due to the pandemic, the bank said at that time.

Indonesia interest rates, 10-year chart

Over 2020, BI had five rate cuts for a total of 125 bps, lowering the BI 7-Day RRR to 3.75% by the end of the year. 

In February 2021, BI lowered the policy rate by 25 bps to a record low 3.50% and kept it unchanged for 17 months until July 2022, according to Indonesia interest rate history data

While its Southeast Asian peers – Malaysia and the Philippines – had started their tightening cycle in May 2022 to match the US Federal Reserve’s (Fed) hawkish rate hikes, Bank Indonesia waited until August to hike its key interest rates. 

On 23 August 2022, Bank Indonesia increased the policy rate by 25 bps to 3.75%, the first rate hike since November 2018 when it lifted the rate by 25 bps to 6%. 

The central bank hiked the rate after inflation rose to near seven-year high of 4.94% in July driven by rising prices of food, beverages and tobacco. Soaring global agriculture prices stemming from Russia’s invasion of Ukraine and rebounded post-pandemic demand had made their way through to the prices of goods and services in the country.

Indonesia inflation rate, 10-year chart

In addition, it aimed to stabilise the Indonesian rupiah amid uncertainties in the global money market. When BI hiked the policy rate in August 2022, the USD/IDR currency pair had gained about 4.1%, reflecting a stronger US dollar (USD) against the rupiah. 

In its September and October meetings, the central bank of Indonesia took a more hawkish stance, raising the BI 7-Day RRR by 50 bps each time, which lifted the rate to 4.75% by October.

Drivers to BI’s rate decision

On 17 November, Bank Indonesia decided to hike the BI 7-Day RRR by 50 bps to 5.25%, in line with market expectations. BI Governor Perry Warjiyo said in a statement on 17 November:

“The decision is a front-loaded, preemptive, and forward-looking step to lower inflation expectation which is still high and to ensure core inflation in the future to fall back within the target of 3% +/- 1% earlier in the first half of 2023.“ 

Indonesia's interest rate rise in November also aimed to stabilise the rupiah to bring it in line with its fundamental value to a stronger US dollar, Warjiyo added. 

Let's dig deeper into the factors driving BI's decision not to slow the pace of its tightening cycle.

  • Rising inflation

Indonesia's inflation rate advanced 5.71% in October 2022, slowing from a seven-year high reached in September 2022 at 5.95%, according to data from Statistics Indonesia (BPS). Core inflation accelerated 3.31% in October, compared to 3.21% in September. 


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Inflation accelerated in September and October as the country’s consumers felt the second round effect of reduced fuel subsidies. 

On 3 September, the Indonesian Government raised raised the price of subsidised gasoline Pertalite to IDR 10,000 (USD 0.64) a litre, from IDR 7,500 (USD 0.45) as soaring crude oil prices, partly caused by the war in Ukraine, had tripled the subsidy budget. The price of subsidised diesel was raised to IDR 6,800 a litre, from IDR 5,150.

Bank Indonesia’s Governor Warjiyo expected headline inflation to stand at 5.6% by end of 2022, compared to consensus forecast of 5.9% and core inflation would still skew to the upside, reaching 3.5% by the end of this year. 

Warjiyo said in a live-streamed press conference

“We want to lower the inflation rate straightaway. Our commitment is to ensure core inflation will be below 4% in the first half of 2023.”
  • Weakening rupiah

The depreciation of the Indonesian currency has accelerated in the past couple of months as the Fed refused to abandon its hawkish tightening cycle. From March to November, the Fed has raised the Federal Funds Rate six times, taking the rate target range to 3.75% to 4% in November 2022. 

The weakening rupiah bode well for exports – it made Indonesia’s key commodities, such as palm oil, coal, nickel and copper, cheaper for foreign buyers. But it could increase inflation because the nation still relies on imports to meet demand for its staples, such as soybean, wheat and sugar. A weakening rupiah typically makes imported goods more expensive.

As of 17 November, the USD/IDR currency pair has gained 9.70% year-to-date (YTD). It’s up 10.22% year-over-year (YoY).

On 11 November, ANZ Research's senior rates strategist Jennifer Kusuma and economist Krystal Tan wrote that recent inflation data did not support aggressive rate hikes because inflation had eased and the pass-through from fuel price adjustments had been weaker than expected. The analysts said: 

“That said, stabilising the IDR has become an increasingly important consideration; a hawkish US Fed gives BI impetus to maintain an assertive response to cap downward pressure on the currency, which has underperformed regional peers over the past month.” 
  • Strong economic growth opens room for higher rate

Indonesia’s economy grew at an annual rate of 5.72% in Q3 2022, compared to 5.44% in Q2 and 5.01% in Q1 on robust private consumption and investment amid global economic slowdowns, according to BPS data. It was above analysts’ expectations of 5.6%, according to analysts at Bank of America (BofA) Global Research.

Mohamed Faiz Nagutha, Asia & ASEAN Economist at BofA’s Merrill Lynch (Singapore), wrote in an Indonesia interest rate analysis note on 8 November:

“We continue to see further improvements in private consumption to be the main driver of growth going forward, even as the inflationary impact of the recent fuel price hikes will likely restrain some consumption demand. Meanwhile, net export contribution is likely to stay robust as Indonesia continues to enjoy elevated terms of trade.” 

Krystal Tan of ANZ Research wrote on 7 November that it might be difficult for Indonesia to maintain the growth pace in Q3 due to rising global headwinds. 

“As the global slowdown deepens, the commodity tailwinds Indonesia has enjoyed will fade. Weaker export revenues will also have implications on domestic demand, including through the fiscal channel,” she said. 

Indonesia’s gross domestic product (GDP) growth was forecast to slow to 4.7% in 2023, Tan added.

Indonesia interest rate outlook for 2023 and beyond

As the global economy is expected to be gloomier in 2023, will BI maintain its front-loading and preemptive policy rate?

BofA forecast BI was likely to have a 50 bps hike in December, taking the policy rate to 5.75% by the end-2022. It maintained BI terminal rate forecast at 6.25% by March 2023. BofA’s Nagutha wrote:

“The solid growth data provides another source of support for BI to continue to hike policy rates in 50 bps increments in the near term and keep rate differentials with the US to compressing too much.” 

ANZ Research pencilled 25 bps rate hikes in December and January 2023 meetings, taking BI’s terminal rate to 5.75% by Q1 2023. “A slowing pace of US tightening and durable relief from USD strength could improve risk sentiment and provide BI some scope to slow the pace of hikes as soon as at its next meeting,” Tan wrote on 17 November.

ING Group forecast Bank Indonesia’s policy rate to stand at 5.75% in Q4 2022 and keep it at that level until the final quarter of 2023. The bank expected BI to gradually lower its rate to 5.5% in Q1 2024 and 5% in Q4 2024. By the final quarter of 2025, BI’s interest rate was forecast to stand at 4.5%.

Final thoughts on Indonesia interest rate rise

At the time of writing (17 November), most analysts forecast Bank Indonesia to keep its “preemptive and front-loaded approach” until the end of the year, before slowing the pace of rate hikes. 

Remember that analysts’ and algorithm-based predictions can be wrong. Forecasts should not be used as a substitute for your own research. Always conduct your own due diligence, looking at the latest news, a wide range of analyst commentary, technical and fundamental analysis before taking any financial decision.

Keep in mind that past performance does not guarantee future returns, and never trade money you cannot afford to lose.


What is the current interest rate of Indonesia?

As of 17 November 2022, Bank Indonesia’s policy rate stood at 5.25%

Why did Indonesia increase interest rates?

Bank Indonesia has raised the country’s policy interest rate four times since August 2022 to support the Indonesian rupiah and to bring down rising inflation.

What is the highest interest rate in Indonesia?

According to data aggregator Trading Economics, Bank Indonesia’s highest policy rate was 12.75% in December 2005.

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