MACROECONOMIC ANALYSIS SERIES: BI Board of Governor Meeting, October 2022

Inflation continues to soar above the BI’s target range after the adjustment of subsidized fuels prices in early September 2022. The price level of energy and transportation sectors recorded the highest jump in September 2022 amid the persistently high global energy and food prices. The increase in price level slightly corrected the consumers’ confidence despite it is still in optimistic territory.  From external side, the trade surplus is declining due to global commodity price normalization. At the same time, risks of global financial turmoil are still lingering with episodes of capital outflows due to aggressive monetary tightening by central banks worldwide. Although BI has raised the policy rate two times, massive capital outflows have weakened Rupiah to IDR15,485 in mid-October. As a pre-emptive measure following the potential episodes of capital outflows caused by further interest rate hikes by the Fed next month, BI needs to raise the policy rate by 50 bps  to 4.75% this month. The ahead of the curve stance is expected to cushion the impact of external uncertainty on domestic financial and foreign exchange markets.  At the same time, the GoI could perform measures to maintain demand recovery and real sector optimism on economic growth prospects.

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