Jakarta, CNBC Indonesia – The trend of increasing interest rates began to enter Indonesia, after Bank Indonesia raised the BI-7 day reverse repo rate benchmark interest by 25 basis points to 6% on October 19 2023. This condition has the potential to slow down the rate of Indonesian economic growth.
Senior economist and former finance minister Chatib Basri explained that an increase in the reference interest rate would certainly increase public credit interest. Making the burden of expenditure or spending even higher amidst stagnant people’s income.
“It’s definitely more expensive. While your wallet is fixed, your savings are fixed. If the burden on your household increases, then what will be the result, consumption will slow down,” said Chatib to CNBC Indonesia, quoted Monday (22/10/2023).
The decline in public consumption is actually starting to be reflected in the weakening of the consumer confidence index (IKK) in September 2023. In that month, the IKK regularly released by BI was at level 121.7 or down from the recorded index figure in August 2023 at level 125.2.
Even so, the latest IKK data is still at an optimistic level because the index figure is above level 100. Along with this, the savings ratio for all expenditure groups, from those with high salaries to those with barely enough, has all decreased.
Bank Indonesia noted that for the expenditure group above IDR 5 million, the savings ratio had fallen from 18.6 to 18.3. The deepest decline was in the IDR 4.1-5 million expenditure group from 17.9 to 16.6, and the IDR 1-2 million group fell from 15.5 to 15.1.
According to Chatib, this phenomenon indicates the implications of the interest rate burden on people’s savings. This means that they continue to maintain consumption, but by taking a portion of their savings or taking on new debt.
“So if people then keep their savings consumption down, they will start to stabilize, eating their savings. Or another option is for those in the middle class, credit cards will go up. They will shop but they will spend through debt,” said Chatib.
Bank Indonesia’s banking survey per quarter III-2023 also recorded an increase in consumption credit distribution. The weighted net balance (WBT) for new consumption credit distribution in that period reached 91.2%, up from the second quarter of 2023 of 85.3%.
“Imagine that his consumption is rising, while his income remains the same, which means what he does is he eats up his savings, right? Well, if he eats up his savings, how long will it last? There are only two choices, he goes into debt or after the next quarter, his consumption will go down,” said Chatib .
Nevertheless, Bank Syariah Indonesia (BSI) Chief Economist Banjaran Surya Indrastomo assessed that the trend of high interest rates does not have an immediate impact on the lower classes of society, considering that the government and Bank Indonesia are still able to control inflation in the target range of 2-4%.
“However, on the other hand, the impact of the long-term economic slowdown due to high interest rates can affect their spending through increased savings for the middle and upper classes, which hinders the development of the real sector, so that transactions and multipliers for the lower classes also decrease,” said Banjaran.
According to him, the direct impact of the current trend of high interest rates will have a greater impact on the performance of the real sector. Because their sources of financing will be higher. However, BI has issued a Macroprudential instrument (KLM) and reduced the macroprudential Liquidity Buffer (PLM) ratio to anticipate this problem and to support financing for national economic growth.
“However, the increase in BI7DRR has the potential to make real sector growth relatively restrained in line with the potential increase in financing costs which are a source of investment and driving force for the real sector. Seeing this potential impact, Bank Indonesia is trying to get around this by issuing this sweet herbal medicine,” stressed Banjaran.
Former Minister of Finance Reveals Criteria for Presidential Candidates, You Don’t Need to Be Good at Economics