Monetary Policy Analysis: Bank Indonesia Raises Its Key Interest Rate to 5.50% in December 2022
As expected, the central bank of Indonesia (henceforth: Bank Indonesia) decided to raise its benchmark interest rate (the 7-Day Reverse Repo Rate) by 25 basis points (bps) to 5.50 percent after concluding its latest (two-day) monetary policy meeting on 21-22 December 2022. Meanwhile, it also decided to raise the deposit facility and lending facility rates by 25 bps to 4.75 percent and 6.25 percent, respectively.
Why was this expected? Well, because the US Federal Reserve also slowed down its aggressive monetary tightening at the end of 2022. This means that the rupiah rate should encounter fewer pressures.
After four straight 0.75 percent point hikes (in June, July, September and November) the Federal Reserve (Fed) raised its key rate by ‘only’ 0.50 percent on 14 December 2022 as US inflation shows an easing trend.
It was certainly an active year for the Fed as it raised its benchmark rate on seven consecutive occasions (to the highest level since 2007) in an aggressive attempt to push US inflation lower. The chart below shows that US inflation is now gradually easing from a 40-year high. However, inflation remains high by historical standards.
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