Bank Indonesia raises reference rate to reduce deficit

Bank Indonesia raises reference rate to reduce deficit

Bank Indonesia (BI) Governor Perry Warjiyo (ANTARA/Aprillio Akbar)

Jakarta (ANTARA News) - Bank Indonesia (BI) has decided to raise its reference "7-Day Reverse Repo Rate" by 0.25 percent to 5.5 percent to reduce the current account deficit and attract foreign investment to boost the currency rate.

"We want to further lower the current account deficit, and of course, it must be below three percent of the gross domestic product (GDP) by the end of the year," BI Governor Perry Warjiyo stated here on Wednesday.

Indonesia's current account deficit has increased to US$8 billion in the second quarter, touching three percent of the GDP. It was higher than that recorded in the first quarter, at $5.7 billion, or 2.2 percent of the GDP.

Warjiyo remarked that the current account deficit had increased in the second quarter due to increasing economic activities that had boosted imports.

He said the deficit was still secure, adding that the bank had hailed the government`s plan to reduce the imports of capital goods and raw materials to control the deficit and rupiah currency rate.

"Actually, the deficit is still safe, but under the current financial market condition, BI and the government have agreed to reduce it further down," he remarked.

The central bank viewed that the reference rate must increase in August to boost the yields of domestic financial instruments to retain the interest of foreign investors to invest in the domestic financial market, he noted.

Currently, the risk premium of domestic financial instruments has increased due to the global economic pressure.

With the increasing reference rate, it is expected to compensate for the increasing risk cost suffered by investors, he stated.

So far, the BI has this year increased its reference rate by 125 basis points. Warjiyo said he is still weighing a room for a hike in the reference rate in the rest of the year in line with the development of global and domestic economic pressure.

Reporting by Indra Arief Pribadi
Editing by Yosep Hariyadi