Bank of Indonesia Hikes Key Interest Rate to Boost Fragile Rupiah
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Indonesia’s central bank on Thursday (17/05) hiked its benchmark interest rate for the first time since November 2014, as expected, in a bid to bolster the fragile rupiah.
Bank of Indonesia (BI) raised the 7-day reverse repurchase rate by 25 basis points to 4.50 percent. In 2016 and 2017 combined, BI cut the key by 200 bps to try to spur lending and faster economic growth.
In a Reuters poll, 13 of 21 economists had predicted a rate at Thursday’s meeting, the last for Governor Agus Martowardojo.
The governor, who will be succeeded by Perry Warjiyo later this month, said the hike was in response to rising global financial uncertainty amid tighter US dollar liquidity.
“BI will continue to monitor economic developments and is ready to take firmer actions to ensure macroeconomic stability,” Agus said.
In the month since BI last met on April 19 and said it would be an “overkill or counterproductive” to be raising rates, consensus expectations swiftly turned to see a rate rise as needed to put a floor under the falling rupiah.
Southeast Asia’s largest economy is one of the region’s worst affected by the combination of rising US yields and higher oil prices, and has seen about $4 billion leave its markets over the past month as foreign investors review their exposure to higher-yielding emerging markets.
The rupiah has fallen more than 5 percent to past 14,000 per dollar in four months as Indonesian 10-year bond yields jumped more than a percentage point over that period, and the stock market is down 8 percent this year.
On Thursday, BI maintained its 2018 economic growth outlook at 5.1-5.5 percent and said that annual inflation would remain within its target range of 2.5-4.5 percent.
Questions & Answers
Q.What specific action did the Bank of Indonesia take to address the rupiah's fragility?
What specific action did the Bank of Indonesia take to address the rupiah's fragility?
The Bank of Indonesia increased its 7-day reverse repurchase rate by 25 basis points, bringing it to 4.50 percent. This was the first rate hike since November 2014.
Q.What factors led the Bank of Indonesia to raise interest rates despite previous reluctance?
What factors led the Bank of Indonesia to raise interest rates despite previous reluctance?
The decision was made due to rising global financial uncertainty, tighter US dollar liquidity, and the need to support the falling rupiah amid rising US yields and higher oil prices.
Q.How has Indonesia's economy been affected by recent global financial conditions?
How has Indonesia's economy been affected by recent global financial conditions?
Indonesia has experienced approximately $4 billion leaving its markets, a 5 percent fall in the rupiah against the dollar, and an 8 percent drop in the stock market this year.
Q.Did the central bank update its economic forecasts following the rate hike?
Did the central bank update its economic forecasts following the rate hike?
No, the Bank of Indonesia maintained its 2018 economic growth outlook at 5.1-5.5 percent and confirmed that annual inflation would stay within its target range of 2.5-4.5 percent.
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