Bank Indonesia Governor Perry Warjiyo on his inauguration in Jakarta on Thursday.

JAKARTA (TheInsiderStories)—Bank Indonesia’s (BI) rate hike is a stop-gap measure to contain the rupiah from falling further but should not be treated as the only solution to push the economy forward.

Rupiah strengthened today after the central bank decided to raise interest rate by 0.25 basis points (bps) to 4.75 percent, while also raising the Deposit Facility and Lending Facility rates by 25 bps to 4.00 percent and 5.50 percent respectively.

In the spot market, rupiah moved higher 0.57 per cent to Rp13,905 per US$1 at 10.00 a.m. local time, while the reference rate of Jakarta Interbank Spot Dollar Rate strengthened 0.58 per cent at Rp13,951 against U.S dollar compared to the previous day.

The political development in Italy may also contribute to the strength of the rupiah. Major financial markets are under pressure as political development in Italy raises concerns over the possibility that the nation would leave the European Union. Italy is the third-largest economy in the Eurozone.

Moreover, other currencies in Asia also strengthened yesterday with the Indian rupee made the most gains at 0.54 per cent, followed by the Singapore dollar’s 0.28 per cent.

In addition, the hike is not enough sentiment to lift Jakarta Composite Index (JCI). The index has closed down 0.94 per cent at 6,011.06 yesterday. The transaction value reached Rp10.4 trillion with a volume of 11.2 billion shares. The foreign investors recorded net sell of Rp212.7 billion.

In addition, the interest rate hike potentially hurts economic growth. Senior analyst Paramitra Alfa Sekuritas William Siregar said BI policy is not good for Indonesia’s economy as a whole. He added a steady or stable exchange rate driven by interest rate hike is likely to support some publicly listed companies in Indonesia Stock Exchange, especially who has big debt in U.S Dollar or companies that highly depends on the imported on raw materials.

However, the rate hike may have an adverse impact in the medium to long-term as the real issue related to rupiah weakening is the persistent current account deficit, which this year is exacerbated by a trade deficit.

Indonesia’s current account recorded deficit of $5.5 billion, or 2.15 per cent of GDP, in the first three months this year. It exacerbated by trade deficit that recorded $1.63 billion in April 2018, the largest since $1.96 billion in April 2014.

He said the interest rate hike would provide a stability in the local unit in short-term, but the economy, particularly household consumption, property, and finances, may see an adverse impact.

In the finance sector, the interest rate hike will increase the interest rate loans and financing and will certainly reduce community’s appetite to get loans for consumption or production. In the end, it will make economy grew slowly.

The Finance Minister Sri Mulyani Indrawati earlier said the lower limit of Indonesia’s economic growth in 2018 will be at 5.17 percent, with the upper limit of 5.4 percent. This lower limit was lower than Bank Indonesia’s estimation that reached 5.2 percent during 2018.