Second Indonesian Central Bank Rate Hike Within Two Weeks

May 30, 2018

In follow-up to the 25-basis point tightening done on May 17th, Bank Indonesia’s Board lifted the 7-day reverse repo rate by 25 basis points to 4.75% after an unscheduled meeting. The deposit facility and lending facility rates were also raised by 25 basis points to 4.0% and 5.5%. Although the economy is performing soundly, a pre-emptive, front-loaded tightening is deemed appropriate to counter selling pressure on the rupiah and anchor expected inflation within the 2.5-4.5% target band.

The need for a vigorous monetary policy in Indonesia is laid squarely on U.S. policy developments:

he pressures on stability, particularly in the Rupiah exchange rate, tend to originate from policy change in the United States (US) which affects all countries, including Indonesia. The economic gains and rising inflation in the United States are placing added pressure on the Federal Reserve to hike the Federal Funds Rate (FFR), with some market players expecting aggressive hikes up to four times this year. A higher expectation of policy rate hike in the US is also attributed to the fiscal deficit, which is predicted to reach around 4% of GDP this year and 5% of GDP in 2019. Those two policy changes have sparked a vertiginous increase in the US Treasury Bond yield and US dollar appreciation against nearly all global currencies. Global financial market uncertainty has also escalated, triggered by the looming US-China trade war, coupled with simmering regional geopolitical tensions. Prevailing global developments have prompted a foreign capital outflow and amplified pressures on financial markets in advanced economies and emerging market economies (EMEs), including Indonesia, manifesting in lower stock prices, higher bond yields and exchange rate depreciation against the US dollar. Indonesia’s economy remains considerably resilient to external pressures, as effectively demonstrated in previous periods of global shocks.

In addition to raising the central bank interest rates, officials are intervening in both the currency and bond markets. Today’s released statement asserts, “Bank Indonesia will continue to optimize dual intervention in the foreign exchange market and government securities (Surat Berharga Negara – SBN) market to stabilize rupiah exchange rates, adjust fair prices in the financial markets and maintain adequate liquidity in the money market.” The two interest rate hikes this month meanwhile reverse half the easing implemented between June 2015 and September 2017.

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



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