Bank Indonesia Tightens Monetary Policy For First Time Since Late 2014

May 17, 2018

Like their Brazilian colleagues late yesterday, monetary policymakers in Indonesia were compelled by recent foreign exchange market developments, namely the strength of the dollar and depreciation of emerging market currencies like the real and rupiah, to shift policy gears. In Brazil’s case, a long string of interest rate cuts was ended, and in the Indonesian instance, central bank interest rates that had been cut in 2016 and 2017 (most recently in September), were raised by 25 basis points. The key 7-day reverse repo rate becomes 4.5% and will be flanked by a 3.75% overnight deposit rate and 5.25% lending rate. The Federal Reserve is set on a course of continuing rate normalization, and because of the possibility that the Fed may move more quickly in the future, the rupiah’s recent depreciation cannot be dismissed as a temporary development.

Bank Indonesia’s Board of Governors released a statement of explanation today that “considers the previous policy mix and current policy response as consistent with efforts to control inflation within the target corridor of 3.5±1% in 2018 and 2019, while effectively managing external sector resilience.” Officials did not change macroeconomic forecasts that see in-target inflation and growth between 5% and 5.5%. Today’s statement casts the rupiah’s fall in the broader context of depreciating emerging market currencies against a strengthening dollar and cites several external risks that will persist in the future and demand its vigilance: “hikes in the federal funds rate and US treasury security yields, the rising oil price, tension in the US-China tradeand geopolitical issues relating to the cancellation of US-Iran nuclear deal.”

Copyright 2018, Larry Greenberg. All rights reserved. No secondary distribution without express permission.



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