Indonesia Central Bank Raises Key Rate to Aid Rupiah, Flags Chance of More Hikes
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Indonesia’s central bank raised its benchmark interest rate for the second time in two weeks on Wednesday (30/05) and flagged more possible hikes as it escalated a battle to boost the fragile rupiah and contain capital outflows.
Newly appointed Bank Indonesia Governor Perry Warjiyo pledged more action to promote financial and economic stability to bolster Indonesian assets amid an emerging market sell-off.
The central bank “will continue to calibrate global and domestic market developments to utilize room for further rate hikes in a measured way,” Perry said after a meeting.
On May 25, one day after being sworn in for a five-year term, Perry called Wednesday’s off-cycle meeting. On May 17, Bank Indonesia raised its key rate by 25 basis points to shore up the rupiah, then trading at its weakest since October 2015. Perry said the additional meeting was needed as a “pre-emptive, front-loading and ahead of the curve step” in response to expectations of higher US interest rates, which could push US Treasury yields higher.
Rahul Bajoria, an economist for Barclays in Singapore, said the two hikes in two weeks “very forcefully signals to the market that the new governor is very serious about maintaining financial stability, and the institution is willing to be pre-emptive in managing risks that are emanating largely from external drivers.”
Currency First
Stephen Innes, head of Asia-Pacific currency trading at Oanda, said Wednesday’s decision showed “currency first and nothing else really matters.”
The governor said Bank Indonesia will discuss loosening its “macroprudential” rules at its meeting in late June, and new ones should be released “soon.” He earlier said the central bank is looking at housing mortgages, but he did not give any details.
In 2016 and 2017, Bank Indonesia cut its benchmark rate by a total of 200 bps in a bid to boost sluggish lending and economic growth.
Perry said he expects loan growth to reach 12 percent at the end of 2018 compared with a year earlier. During much of 2017 and until April this year, annual loan growth was in single digits. April’s growth rate was 8.9 percent.
“will continue to calibrate global and domestic market developments to utilize room for further rate hikes in a measured way,”
With loan growth low and consumption weak, Indonesia’s annual economic growth has been stuck at about 5 percent.
On Monday, Finance Minister Sri Mulyani Indrawati said: “We are ready to take any kind of policy to support Indonesia’s economy,” adding that if short-term measures mean slightly lower growth, “then that consequence has to be accepted.”
The government has a 2018 growth target of 5.4 percent. Bank Indonesia said on Wednesday that it still expects expansion of 5.2 percent, better than last year’s 5.07 percent.
Sound Key Indicators
The rupiah, one of the worst performers among Asian currencies this year, barely moved following the rate announcement. It was trading at about 13,985 per dollar at the time it was made.
Sri Mulyani and other senior officials on Monday sought to shore up confidence in Southeast Asia’s biggest economy at a time Indonesia, like other emerging markets, has seen an outflow of funds as US assets become more attractive due to rising interest rates.
Key economic indicators are sound, Perry said, noting that the annual inflation rate is seen at 3.6 percent at the end of 2018, while the current-account deficit is expected to below 2.5 percent of gross domestic product, which Bank Indonesia considered “healthy.”
Harry Su, managing director at financial research firm Samuel International, said the central bank “is now doing more proactive and forward-looking policy, particularly with regard to a possible higher current-account deficit, as well as inflationary pressure stemming from the current higher oil price environment.”
All but one of 18 analysts in a Reuters poll expected Bank Indonesia to raise the key rate on Wednesday.
Questions & Answers
Q.What prompted the Indonesian central bank to raise its benchmark interest rate twice in two weeks?
What prompted the Indonesian central bank to raise its benchmark interest rate twice in two weeks?
The central bank raised the rate to boost the rupiah and contain capital outflows. It also acted as a pre-emptive step in response to expectations of higher US interest rates.
Q.What was the previous approach of Bank Indonesia regarding interest rates before these recent hikes?
What was the previous approach of Bank Indonesia regarding interest rates before these recent hikes?
In 2016 and 2017, Bank Indonesia cut its benchmark rate by a total of 200 basis points. This was done to try and boost sluggish lending and economic growth in the country.
Q.What is the central bank's forecast for key economic indicators like inflation and the current-account deficit for 2018?
What is the central bank's forecast for key economic indicators like inflation and the current-account deficit for 2018?
The central bank expects the annual inflation rate to be 3.6 percent at the end of 2018. It also anticipates the current-account deficit to be below 2.5 percent of GDP, which it considers healthy.
Q.How has the new governor's actions been perceived by financial analysts?
How has the new governor's actions been perceived by financial analysts?
Analysts view the two rate hikes as a strong signal that the new governor is serious about maintaining financial stability. They also see it as proactive and forward-looking policy.