Wednesday, September 27, 2023 | 15:05 WIB

Tough test for Central Banks

Jakarta, IO – Under the scrutiny of watchful eyes of the markets, US Fed Chairman Jerome Powell and UK Governor of Bank of England Andrew Bailey, together with their respective colleagues in the Boards, made the tough decision to raise the interest rate once again. Both men recently hiked it by 25 basis points. 

With these moves, BoE has bumped up interest rates eleven times in 18 months, while the US Fed has done it 9 times in a year. The current rates are, respectively, 4.35 per cent in the US, and 4 per cent in UK. However, with respect to the rate of inflation, the US reports 6.1 per cent, while the UK figure is 10.1 per cent. 

Some critics immediately responded, declaring that they must continue fighting inflation, in the midst of calming banking turmoil and acknowledging the possibility, even if a slight one, of a recession.

Nevertheless, the two authorities in the US and the UK could claim that they have been successful in avoiding a crisis of the 2008 type in their respective economies, at least for now. The unemployment rate in both countries is around 3.5 per cent, which is very commendable from all counts. 

To be fair, we have to give them a thumbs up, if not declaring an outright victory of the authorities on both sides of the Atlantic. The firm decision by the trio of Treasury Secretary Janet Yellen, Fed Chair Jerome Powell and FDIC President Martin Gruenberg should be commended.

Their carefully elaboration of a scheme for JP Morgan Chase, with Jamie Dimond helping both SVB and Republic Bank, also worked well. Similarly, the trio of the Minister of Finance, the President of the Swiss National Bank and the CEO of UBS to purchase rival Credit Suisse for an agreed amount were commendable as well. 

I recall that prior to the Asian Financial Crisis that created so much trouble for our banks, Bank Indonesia was also forced to deal with ways to resolve problem bank issues. Bank Indonesia was brokering the process of bank mergers between weakly-capitalized banks and their bigger and stronger ones, similar to the way Credit Suisse was purchased by the UBS.

During my term of governorship, Bank Indonesia successfully worked on these, resolving issues for a number of troubled-banks, capital-wise and at times also management-wise. When I started working in Bank Indonesia there were more than 250 banks, many small and undercapitalized.


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