Jackson Hole Meeting: Fed Affirms 2% Inflation Target, Interest Rate Hike Still Possible.

The Fed's Jackson Hole meeting on Friday provided no new surprises, with markets focused on Fed Chair Jerome Powell's speech. Powell reiterated the Fed's commitment to the 2% inflation target, but also acknowledged that higher interest rates could have a negative impact on growth. He did not provide specific guidance on future interest rate increases, but said that the possibility of an interest rate increase still exists if deemed necessary. Powell's speech was seen as a sign that the Fed was in no rush to make aggressive interest rate hikes. However, it also makes clear that the Fed is still committed to controlling inflation.

BI Holds Interest Rate at 5.75%

Bank Indonesia (BI) maintained its benchmark interest rate at 5.75% at the Board of Governors Meeting (RDG) for the period 23-24 August 2023. This is a decision that BI has taken for seven consecutive months, since January this year. The decision to hold interest rates was in line with consensus expectations. BI's focus is still on the stability of the rupiah exchange rate to mitigate external pressure. Even though until last week's meeting BI had still not given any indication regarding plans to increase interest rates, various economists have begun to speculate on the possibility of increasing interest rates this year to maintain balance with the Fed's interest rates. According to BI expectations, the Indonesian economy in the 3rd quarter of 2023 is expected to remain solid with estimated growth of 5.11 – 5.15% YoY, while inflation is expected to be at the level of 2.9% at the end of 2023.

Implementation of Taxes on Sugary Drinks and Plastic.

The government plans to implement new taxes on sugary drinks and plastic, which are planned to be implemented next year. The initial plan to tax sugary drinks also includes soda, soft drinks, packaged tea, coffee, energy drinks and concentrates. According to the latest guidelines, the tax rate is estimated to be between IDR 1500-IDR 2500 per liter for sweet drinks and IDR 200 per bag or IDR 30,000 per kilogram for plastic. However, the implementation of this new tax could cause an increase in the prices of sugary drinks and plastic, and is estimated to result in an increase in inflation of 0.1%. Apart from that, the implementation of this tax will contribute positively to government revenue from the excise sector, which according to the 2024 budget plan is estimated at IDR 246.1 trillion, an increase from this year's estimate of IDR 227.2 trillion.

Key Takeaways

The Fed's Jackson Hole meeting on Friday provided no new surprises, with markets focused on Fed Chair Jerome Powell's speech. Powell reiterated the Fed's commitment to the 2% inflation target. He did not provide specific guidance on future interest rate increases, but said that the possibility of an interest rate increase still exists if deemed necessary. Powell's speech was seen as a sign that the Fed is in no rush to make aggressive interest rate hikes. However, it also makes clear that the Fed is still committed to controlling inflation.

For the domestic economy, Bank Indonesia (BI) maintained its benchmark interest rate at 5.75% at the Board of Governors Meeting (RDG) for the period 23-24 August 2023. This is a decision that BI has taken for seven consecutive months, since January this year . The decision to hold interest rates was in line with consensus expectations. BI's focus is still on the stability of the rupiah exchange rate to mitigate external pressure.

In other economic news, the government plans to implement new taxes on sugary drinks and plastic, which are planned to be implemented next year. According to the latest guidelines, the tax rate is estimated to be between IDR 1500-IDR 2500 per liter for sweet drinks and IDR 200 per bag or IDR 30,000 per kilogram for plastic. However, the implementation of this new tax could cause an increase in the prices of sugary drinks and plastic, and is estimated to result in an increase in inflation of 0.1%.

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