The Fed's Interest Rate Increase for the Indonesian Financial Market
Rancakmedia.com – In the following, we will provide information about the impact of the Fed's interest rate increase on the Indonesian financial market, please refer to this information in detail until the end.
The increase in the United States (US) central bank interest rate is predicted to have a serious impact on the Indonesian economy, one of which is causing the rupiah to continue to weaken.
The US central bank (Federal Reserve) announced an increase in interest rates by 0.75 percent to 1.75 percent on Wednesday (15/06), in order to reduce product prices which continued to rise.
The Fed, the US central bank, raised its benchmark interest rate to a record high, marking the first time in 30 years it has done this.
Since the beginning of the year, the US dollar exchange rate has increased by 10% as a result of the hike interest rate bank. As a result, the value of other currencies fell, especially the rupiah. Based on Bloomberg estimates, the rupiah weakened 0.31 percent to Rp 14,745 per USD on Wednesday (15/6).
Rupiah exchange rate against the dollar is expected to fall after the Federal Reserve's decision to raise interest rates by 75 basis points, although it had strengthened on Thursday morning, June 16
The Fed's Interest Rate Increase
This is the third time the US central bank has raised interest rates since March, after US inflation rose last month. The increase in interest rates is projected to continue, which will raise concerns about the global economy.
The governor of the Indonesian central bank (Bank Indonesia) Perry Warjiyo called the movement of the Fed's interest rate a "risk that is regularly monitored and expected".
"Hopefully there will be no surprises globally and domestically so that the domestic economic recovery continues, economic and financial stability is maintained, inflation is maintained, and the exchange rate is maintained," Perry said in a seminar entitled Managing Inflation to Boost the Economy. Wednesday, June 15th, growth.
Perry believes the Fed's interest rate will rise to 2.75 percent this year, then increase again next year to 3.25 percent.
The consequence of increasing the Fed's interest rate is that the central banks of other countries will take similar steps which will mark major changes in the global economy.
This approach will have a significant impact on businesses and individuals who have benefited from historically low interest rates.
Gregory Daco, chief economist at EY-Parthenon, said that most rich and developing countries alike were tightening monetary policy at the same time.
Meanwhile, the United Nations and the World Bank believe that current global inflation will add an estimated 75 million – 95 million poor people by 2022, worse than their estimates before the epidemic.
Inflation 'surprises'
Thursday (17/06), the UK central bank is expected to announce its sixth rate hike since December after consumer prices rose 9% in April.
For the first time since 2009, the UK's benchmark interest rate is expected to rise beyond 1 percent.
Interest rates have already been raised by the governments of Brazil, Canada and Australia, and the European Central Bank has announced intentions to do the same later this summer.
Meanwhile, US interest rates, which were lowered in 2020 to help the economy during the epidemic, have been raised twice this year, by 0.25 percent each in March and May.
Fed Chair Jerome Powell dubbed the 0.75 percent increase "unbelievable and strong", adding it took steps to limit inflation and stabilize prices.
"It is very important that we bring inflation down," he said
"The rise in inflation over the last year is definitely a surprise and further surprises are on the cards," he said.
“Therefore, we must be agile.”
Catching Up
The increase in the price of goods in the US has occurred since last year. But back then, Powell said it was due to supply chain concerns.
However, inflation has continued to grow dramatically since then, driven by the conflict in Ukraine and lockdowns in China due to a spike in Covid cases.
Recent opinion polls show the public expects inflation to continue to worsen, even though the Fed has reacted by raising interest rates.
"The Fed is facing a test of the credibility of inflation," said economist David Backworth, senior fellow at the Mercatus Center at George Mason University.
Inflation Expectations
Ignacio Lopez, a US citizen, is anxiously awaiting a reduction in inflation. The rising cost of food for restaurant chefs in Boston has been a problem for him for the last 18 months.
In particular, he said, prices for commodities with long supply chains, such as packaged foods and imported cheese, had been cut. He described the situation as
"It's crazy and it doesn't stop," he said.
"Every week everything goes up."
Businesses have hiked the prices of their goods to keep up with expenses, but Lopez said he can't increase the prices of his food too much for fear of losing consumers.
He fears an increase in tariffs won't help, as consumer demand remains sluggish due to Covid, which curtailed after-work gatherings that generally turn the wheels firmly.
"We're just going to continue to manage it as tightly as we can, try not to increase prices outside of our market and hope things settle down," he said.
Nearly three decades ago, in 1994, the Fed raised interest rates this high for the last time. Slow to respond, and now pushing more aggressively to catch up, US officials run the risk that their actions may contribute to stalling economic growth, according to Daco.
"I wouldn't be surprised that around the turn of the year we had [economic] growth stalled and we were quite close to a recession, with the unemployment rate rising and no longer declining."
By making borrowing more expensive, these increases in interest rates would slow down economic activity, dull demand – and in theory, reduce price pressures.
Projections provided by the Fed predict economic growth to fall to around 1.7 percent this year, lower than the previous projection in March.
The unemployment rate, which has now reached 3.6 percent, is predicted to rise to 3.7 percent and reach 4.1 percent in 2024.
The Impact of The Fed's Interest Rate Rises on Economies Around the World
With the current increase in interest rates, bank lending rates will return to their previous levels in 2019, or be lower compared to historical statistics. The recent increase in interest rates, on the other hand, is having an effect.
Higher interest rates have helped increase demand for dollars. As a result, the US dollar exchange rate has risen 10 percent since the beginning of the year, while other currencies have weakened.
Mortgage rates rose in line with the Fed, causing a sharp decline in home sales.
Wednesday's announcement of a rate increase also saw a decline in retail sales last month, as higher gasoline costs have prompted Americans to spend more on fuel.
The average price of gasoline in the US is US$5 per gallon, in the US, gasoline is currently priced at US$5 or equivalent to Rp. 73,000, per gallon (equivalent to 3.7 liters) (equivalent to 3.7 liters).
Consumer prices are expected to peak in March 2022, according to economists. There was an 8.6 percent jump in May 2022 compared to the previous year's figure.
Powell said managing price increases is critical to economic stability and it will take time for prices to recover.
"Ultimately, the outlook is very uncertain," Beckworth said.
Impact of The Fed's Interest Rate Increase in Indonesia
It's no secret to Indef co-founder and senior economist Didik Rachbini that rising energy and food prices have had an impact on inflation in various countries, including Indonesia.
He claimed that inflation would undermine people's purchasing power, while for investors, inflation would raise interest rates so that investment and economic activity would be limited.
Meanwhile, Indef Economist Dradjad Hari Wibowo claims the impact of the Fed's actions will have a very serious impact on Indonesia.
"Prices will be lifted up. Money is running to America, this outflow is also difficult to predict. The series (the impact of the Fed's policy) will be long," said Dradjad
The monetary policy reaction to reduce inflation by raising the benchmark interest rate will ultimately undermine investment, especially foreign direct investment (FDI) into developing countries because capital will prefer to flee to its home country and secure assets such as USD.
When interest rates rise, so do borrowing costs, which can hinder future investment plans because of the high stakes involved.
Meanwhile, inflation continued to increase causing several countries to experience a negative balance of payments.
"The government has received approval from the DPR to increase subsidies, especially for premium, diesel, electricity, LPG, and also increase social assistance," explained Perry.
Fiscally, Perry believes that the government has increased subsidies to offset some of the inflationary effects of rising global energy and commodity prices.
According to Perry, the DPR has given the green light to the government to increase subsidies for premium fuels such as diesel, electricity and LPG, as well as social assistance.
Non-subsidized products such as Pertalite and Pertamax experienced price increases. So far, Bank Indonesia has purchased IDR 224 trillion worth of SBN as part of its contribution to pay for health and humanitarian spending, according to Perry.
"We leave it to the government to allocate part of it to finance the subsidy earlier," he said.
"Because of strong fiscal and monetary coordination, the increase in global energy and commodity prices did not have a significant impact on domestic inflation."
Conclusion
The rupiah exchange rate against the dollar is expected to fall after the Federal Reserve's decision to raise interest rates by 75 basis points, even though it strengthened on Thursday morning, June 16. The governor of Indonesia's central bank called the Fed rate hike a “regularly watched risk”.
Interest rates have been raised by the governments of Brazil, Canada and Australia. The European Central Bank has announced its intention to do the same later this summer. US interest rates were cut in 2020 to help the economy during the financial crisis but have now been lifted twice this year.
Opinion polls show the public expects inflation to continue to worsen, even if interest rates are kept at their highest since 2008. The Fed "faces a test of the credibility of inflation," said economist David Backworth.
