Bank Indonesia deputy governor Dody Budi Waluyo has said that Indonesia cannot avoid pursuing a high interest rate policy as central banks of other countries were also raising interest rates.
“The risk that is our main focus is exports. The next is that our peers are tending to impose higher interest rates,” he said in Jakarta on Tuesday as quoted by kompas.com while giving an address at the Indonesia Risk Management Outlook 2019 event.
At present, BI’s seven-day reserve repo rate ( 7DRRR ) is at 5.75 percent after the central bank increased its reference rate by 25 basis points in October.
Dody said central banks in the region were increasing reference rates in an effort to attract capital inflows that had dropped off following the strengthening of the United States dollar on the back of an improved US economy.
Dody said BI had started to see increased capital inflow in the last week, but admitted that Indonesia’s economic fundamentals remained weaker than countries like Malaysia, Thailand and Singapore.
He explained that the high interest rate regime could have impacts on the Indonesian financial system’s liquidity problem, corporate balance sheet, inflation and the risk of corrected economic growth.
He, however, expressed optimism about the country’s economy for 2019. “With all the risks of 2018, our stability is relatively good, the rupiah’s performance is still within the fundamental limit and domestic demand is sufficiently strong. This gives us hope for 2019,” Dody added.