The Two-side Of BI Rate Increase

The Fed, on 14 of June, has announced their Federal Open Market Committee (FOMC) meeting result. They announced that the Fed Fund Rate (FFR) increased by 25 bp from 1.75% to 2.0%. The changes of the FFR, even only the news that it will be change, have a significant impact on many countries, especially in emerging countries including Indonesia. The fluctuation of market, such as exchange rate and composite index are some of the examples. To deal with this problem Central Bank of Indonesia held an additional meeting in which they try to adjust BI rate to the increase of FFR. Before the FOMC meeting, Central Bank held an additional meeting to increase the BI rate from 4.5% to 4.75%, to anticipate the increase of FFR. At the end of this month, after the FOMC meeting, Central Bank of Indonesia will hold another additional meeting that will expectedly increase BI rate again.

From the increase of BI rate, we can actually see the positive result as Rupiahs are strengthening at the time when the policy was announced, on the end of May. But unfortunately, the effect is not long since there is still uncertainty on what The Fed meeting result will be and hence the market still fluctuates. Looking at this positive result, the additional meeting of Indonesia Central Bank may result in another increase of BI rate and let us hope that it can strengthen Rupiahs again.

On the other hand, problems might occur from this increase. The increase of BI rate has pushed banking industry to adjust their rate with the market. Banks are increasing their deposit rate but not their credit rate, as they believe they can maintain their non-performing-loan ratio. Some of them believe that the increase of BI rate would not impact their non-performing loan (NPL), as it is not the only factor. But as the supply of money in the bank is increasing from the increase of deposit rate, it is wiser for banks to make sure that they give credit to those who have a good creditworthiness. They need to tighten the requirement for the creditor so that NPL will not increase.

Therefore, banking industry and government need to be careful in making their next step if BI rate is increasing again.

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