BI Value Economist Suggests More 'Hawkish' Policy Implementation
The current interest rate hike is not due to an economic collapse or high inflation; rather, it is necessary to avoid paying a higher price in the future. Jakarta (ANTARA) - Trimegah Sekuritas Indonesia Chief Economist Fakhrul Fulvian believes that Bank Indonesia (BI) needs to re-adopt a more hawkish (aggressive) and pre-emptive (anticipatory) policy stance amidst ongoing pressure on the rupiah.
According to him, the current situation is no longer solely a matter of oil prices or the direction of US Federal Reserve interest rates, but has begun to touch upon a more fundamental issue: the credibility of Indonesia’s macroeconomic policy anchor.
“In such a situation, the central bank is not just managing inflation. The central bank is maintaining the policy anchor itself. When the market begins to question where the rupiah’s terminal level lies, where the inflation anchor is, and how fiscal-monetary coordination will proceed, the future cost of stabilisation could become much more expensive,” Fakhrul stated in Jakarta on Monday.
He observed that the absence of sufficiently firm adjustment signals, particularly regarding domestic energy prices, the direction of subsidies, and fiscal calibration, has caused the pressure of adjustment to shift almost entirely onto the rupiah exchange rate. In the post-1998 open capital flow regime, this condition has the potential to trigger more aggressive Dornbusch overshooting phenomena.
Therefore, he believes Bank Indonesia needs to return to the classic stabilisation approach successfully used during previous periods of external pressure: Pre-emptive, Front Loading, and Ahead the Curve. In the current context, he suggests such a move might require an increase in the BI Rate of 50 basis points (bps).
“This interest rate hike is not because the economy is collapsing or inflation is already high. On the contrary, it is required so that we do not pay a higher price in the future due to the loss of the expectation anchor,” he said.
Furthermore, Fakhrul reminded that Indonesia undertook similar measures in 2018. At that time, Bank Indonesia raised interest rates aggressively even though domestic inflation remained relatively controlled. The move was made to maintain rupiah stability and restore market confidence before pressures intensified.
“In emerging markets, monetary policy cannot be merely backward-looking towards the CPI. The central bank must also manage expectations, exchange rate stability, and the medium-term inflation anchor. If we wait for inflation to fully appear in the data, the market will usually force much harsher adjustments beforehand,” he explained.
An increase in the BI Rate is not necessarily seen as excessive tightening against the real economy. He noted that Indonesia currently possesses macroprudential instruments that are far more flexible than in previous tightening cycles. With coordination alongside the OJK (Financial Services Authority), credit distribution to priority sectors can still be maintained through liquidity incentives and more targeted sectoral policies.
“This is not an anti-growth policy. This is an effort to maintain macroeconomic stability so that growth is not more deeply damaged by imported inflation, balance of payments pressure, and a surge in risk premiums,” added Fakhrul.
Regarding the financial markets, Fakhrul believes BI’s hawkish move could actually help normalise the domestic market structure. Currently, there is a distortion between short-term sterilisation instruments, such as the Bank Indonesia Rupiah Securities (SRBI), and the long-term bond market, causing fund flows to be overly concentrated in short-duration instruments.
“We need a healthier and steeper yield curve. Too much flattening of the curve could create greater instability in the future. If BI’s credibility is restored and rupiah volatility begins to decline, investors can return to long-term bonds and other long-duration assets,” he said.
He estimates that if the policy response is swift and credible, the rupiah’s overshooting phase could reverse into a relatively sharp appreciation, with a projection of the rupiah returning to the range of Rp16,800 per US dollar.
In addition to monetary policy, Fakhrul emphasised the importance of stronger fiscal communication from the government, including clarity on the direction of energy subsidies, bond issuance strategies, and the diversification of state funding sources. He believes Indonesia should begin expanding non-US dollar financing sources, such as RMB/Renminbi funding and the issuance of Dim Sum Bonds, amidst an increasingly fragmented world.
“The world is changing. Global liquidity no longer relies solely on the US dollar. Indonesia must begin building more diverse financing strategies so that the future cost of stabilisation is not entirely burdened onto the rupiah and the domestic market,” he concluded.