JAKARTA: Interim Bank of Indonesia (BI) governor Destry Damayanti, widely expected to become the central bank’s chief soon, conveys a restrictive monetary policy stance in a turbulent global economy but also emphasises the need to push growth.
Following the central bank’s monthly two-day policy meeting, Destry announced in a press conference on Wednesday that the BI Rate was kept at 5.75%, where it has been since June.
“We are entering an era called higher for longer, whereby we will face high pressure on the financial sector as well as global financial markets,” said the interim governor.
This was Destry’s first time leading the Board of Governors meeting after Perry Warjiyo suddenly resigned as BI governor in late July.
She has been nominated as the sole candidate for the post, but the House of Representatives has yet to conduct its vetting process to approve her.
Destry explained the need for “stability” amid a high likelihood of the United States Federal Reserve holding the Federal Fund Rate higher for an extended period to rein in US inflation pressure from high oil prices due to the Middle East conflict.
She went on to say that the United States would likely need to issue more debt, which in turn would raise US Treasury yields. High US bond yields and interest rates “have an impact on our economy”, said Destry.
The global bond market has recently undergone a massive selloff pushing up yield due to concerns over ballooning government debt levels in major developed economies.
Analysts have warned that the United States debt pile of almost US$40 trillion looks increasingly unsustainable.
Aside from the United States, Germany, Japan and the United Kingdom have all seen yields spike to the highest in many years or even decades recently.
This environment created an additional air of uncertainty that Destry said was holding back investors’ appetite for assets of emerging markets like Indonesia.
Indonesia’s 10-year bond also recorded a yield spike on Tuesday but concluded Wednesday with a level lower than last week’s, before the global selloff occurred.
The rupiah has remained around 17,850 per dollar over the past week.
“We are still prioritising stability now because we see that global pressures have not eased yet,” said Destry, adding “but we’re trying to be balanced; we maintain stability, but growth is also our mandate”.
Growth is indeed part of the central bank’s mandate since the enactment of the Financial Sector Development and Strengthening (P2SK) Law in 2023.
Since his election campaign, President Prabowo Subianto has been adamant about his intention to push gross domestic product growth above the 5% rate Indonesia has grown accustomed to.
Concerns that the Prabowo could pressure the central bank into supporting his growth goal with lower lending rates grew when his nephew Thomas Dijawandono was appointed as a BI deputy governor early this year and when the P2SK Law was amended to include a job creation mandate for the central bank.
Those concerns abated somewhat when Perry announced three consecutive rate hikes within less than a month in May and June to protect the rupiah but arose anew when Perry suddenly resigned as governor, reportedly for “personal reasons”, with two years left in his term.
Prabowo’s decision to nominate Destry for the post helped ease investors’ worries about central bank independence, as most analysts perceive her to be a solid, credible candidate.
Rahma Gafmi, an economics professor at Airlangga University, told The Jakarta Post on Wednesday that, rather than hawkish, Destry’s stance was more correctly read as “restrictive and vigilant” for stability, given her focus on global interest rates and how to respond.
However, she raised concerns about Destry’s statement on the growth mandate amid a higher for longer environment, which Rahma said could become the start of a “policy trade-off” where BI might become stuck in a dilemma whether to keep rates high to maintain stability or lower them to push growth.
“Behind the concerns, however, the stress that growth remains BI’s mandate has an important communication function: BI wants to allay market and business concerns that the central bank only focuses solely on maintaining the rupiah at the cost of domestic economic growth,” said Rahma.
“It’s a form of commitment that the stability being maintained is stability for growth, not a stiff stability,” she added.
Permata Bank chief economist Josua Pardede concurred, saying that, essentially, there was no conflict per se between keeping the BI Rate high and still wanting to push growth.
“In the August meeting, BI kept the benchmark interest rate at 5.75% to maintain rupiah and inflation, but at the same time it kept a loose macroprudential policy to enlarge financing to the real economy, ensuring adequate liquidity,” said Josua. — The Jakarta Post/ANN
