The Reason why BI Rate sill cannot decline yet

Penulis: Aria W. Yudhistira

Editor: Aria W. Yudhistira

9/10/2015, 06.38 WIB

Bank Indonesia will make sure the stability of the financial system before changing their monetary policy. Right now, the greatest challenge of BI is the level of deficit in the current account.

Bank Indonesia
Arief Kamaludin|KATADATA

KATADATA - The strengthening of rupiah exchange rate that occurred in the last one week cannot become the indicator for Bank Indonesia (BI) to reduce the BI benchmark rate now. Other than because the rupiah is still not stable yet, BI is still facing a high level of deficit in the current account. 

According to David Sumual, the lead economist of Bank Central Asia (BCA), BI can at least reduce the benchmark interest rate at the start of next year. “Right now the volatility of rupiah is still very high, so it is still not possible to reduce the BI rate,” David said when Katadata contacted him, Thursday (8/10). 

Besides, the rupiah strengthening that occurred in the last one week is also because rupiah’s value has become too low or undervalued. Since the start of the year, rupiah had plunged deep, weakening to almost 19%, which then attracted investors to buy assets in rupiah. 

He then continued that for BI, before changing the monetary policy, it is important to make sure whether there is stability in the financisal market or not. The problem here is if they rush into things to change the benchmark rate, then it has a high potential to disturb the economic performances, especially on the trading sector. 

And even though it has been better, Indonesia still faces a high deficit level in the current account. During the second quarter of the year, the deficit was at 2.05% towards the gross domestic product (GDP). This number is the lowest ever compared to the same period in the last three years. 

Besides that, BI also sees that the level of inflation is still not stable yet because of the effect of the increase in the fuel price last November, which can still be felt until now. In September, the Central Statistics Agency (BPS) recorded a deflation in the amount of 0.05%, but on a year on year (yoy) basis there is still inflation in the amount of 6.83%. 

But, the core component was still high in September, which wa around 0.44%. And on a yearly basis, it even increases from 4.92% in August to become 5.07%. “Maybe at the start of the year, BI can be more flexible to reduce the benchmark rate,” David said. 

According to him, Indonesian current condition cannot be compared to India, which had reduced their benchmark rate in the amount of 50 basis points (bps) from 7.25% to 6.75% on last September 29. This happened because India does not have such problem like the deficit in the current account, which makes the rupee currency not to plunge as deep as rupiah against the US dollar. India is seen to be successfully lowering the deficit in their current account.

And economist from DBS Group Research Gundy Cahyadi said the same thing. According to him, BI in these days will concentrate to keep the stability in the financial system because it is still considered as crucial; and even though it has strengthened by 6% in the last one week, rupiah cumulatively still weakens by 10% since the start of the year. 

“The weakening of rupiah is still a problem, including the inflation and production, so that there is still no space for BI to cut or reduce the benchmark rate in these days,” Gundy said.

Reporter: Aria W. Yudhistira

Your Email Has Been Registered
sorry there was a problem signing you in
Please Fill Email Address
Fill Email Correctly
Please type the Captcha correctly