Jakarta – Bank Indonesia, the country's central bank, has decided to raise the benchmark interest rate by 25 basis points to 3.75 percent on Tuesday in a preemptive move to mitigate rising inflation ahead of the government's plan to increase fuel prices.
That was the central bank's first increase in the last 18 months, following the steps of major central banks in the region and developed countries that began increasing their interest rates a few months earlier.
Despite that, Governor of Bank Indonesia Perry Warjiyo argued that Tuesday's increase was a pre "pre-emptive and forward-looking" move.
"The benchmark interest rate increase was a pre-emptive and forward-looking move to mitigate the risk of rising core inflation and inflation expectations due to rising prices for non-subsidized fuel oil (BBM) and rising volatile food inflation" Perry said in a statement.
He added that the increase was "necessary to strengthen the rupiah exchange rate stabilization policy so that it is in line with its fundamental value in the face of high uncertainty in global financial markets."
In line with this decision, Bank Indonesia (BI) set the Deposit Facility interest rate at 25 basis points to 3 percent and the Lending Facility interest rate at 4.5 percent.
Indonesia saw inflation accelerate to 4.94 percent annually in July, reaching the fastest pace since 2015. Core inflation, which excludes volatile foods price and administered like fuel, also accelerated to 2.86 percent last month from 2.63 percent a month earlier.
Perry previously expected this year's core inflation rate to remain below the 4 percent level despite the propagation impact of high food inflation and price inflation regulated by the government.
However, with the government's plan to increase subsidized fuel prices, he now said the core inflation rate would exceed BI's target by the end of the year.
Fuel price increase
President Joko "Jokowi" Widodo said that he had tasked his economic aides to calculate a plan to increase the price of Pertalite, the most consumed gasoline in Indonesia today, to Rp 10,000 per liter from Rp 7,650 per liter.
"I ask everything to be meticulously calculated before it is decided," Jokowi said on Tuesday.
"It needs to be projected how [the fuel price increase] would cause high inflation, which in turn drag economic growth," he said.
The government had increased the fuel subsidy budget to Rp 502 trillion this year to keep domestic fuel prices steady with rising global oil prices. But, high fuel consumption amid strong economic recovery showed the budget might not be enough.
The Ministry of Finance data showed the country consumed 16,8 million kiloliters of Pertalite by the end of July, about three-quarters of the quota allocated for this year.
The foreign exchange and stock market welcomed Bank Indonesia's latest interest rate increase. The rupiah closed up 54 points to 14,837 against the US dollar on Tuesday, from 14,881 on Monday.
The Jakarta Composite Index rose 0.78 percent to 7,163.26, recovering some of its loss from Monday. All sectors except transportation and loc=gisteics gained on Tuesday, with energy and primary material leading the pack.