Bank Indonesia Raises Its Key Interest Rate to 5.75%, Rupiah Rate Rebounds in January 2023

In a statement Bank Indonesia said the rate hike is “a front-loaded, pre-emptive and forward-looking follow-up measure to continue lowering inflation expectations and inflation moving forward.”

As is known, Bank Indonesia has two key tasks: (1) keep Indonesian inflation under control, and (2) safeguard a stable rupiah rate.

Regarding inflation, Indonesia is in a safe environment as inflation has not spiraled out of control like we saw abroad. Bank Indonesia targets Indonesian inflation to ease to 2.0 – 4.0 percent year-on-year (y/y) in 2023. Meanwhile, the rupiah has also been strengthening against the US dollar since the second week of January 2023. In order to understand rupiah movements, we need to shift to the United States first.

Federal Reserve Policy

Bank Indonesia’s decisions can be seen as response toward market reactions made in anticipation of US Federal Reserve (Fed) policy adjustments. And therefore, it is important to take a look at the latest news from the US.

Indeed, the Fed has become less aggressive in terms of monetary tightening as US inflation has been easing over the past couple of months. In 2022 US inflation was at a 40-year high, prompting the Fed to engage in a series of steep interest rate hikes.

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