Third Indonesian Central Bank Interest Rate Hike Since May 17th

June 29, 2018

Bank Indonesia’s Board of Governors today raised the 7-day reverse repo rate by a greater-than-expected 50 basis points to 5.25%. The move followed quarter percentage points hikes on May 17 and  May 31 and was accompanied by 50-bp increases in Indonesia’s overnight deposit rate to 4.5% and lending rate to 6.0%. A statement released after this decision depicts decent trends in the baseline forecast but rising uncertainties that could overwhelm that outlook. Officials see the need to be “pre-emptive, front-loading, and ahead of the curve move to maintain the domestic financial market’s competitiveness against several countries’ changing monetary policies as well as high global uncertainty.” The statement goes on to spell out more explicitly the elements of uncertainty faced by Indonesia and other emerging economies:

Global liquidity tightening and global financial market uncertainty are explained by expectations of an aggressive federal funds rate hike after the FOMC meeting in June 2018, coupled with high U.S. Treasury yield volatility. Ubiquitous global uncertainty also stems from European Central Bank policy to reduce asset purchases, People’s Bank of China policy to lower the reserve requirement, the rising global oil price and deteriorating US-China trade relations. The uncertainty could feed through to broad U.S. dollar appreciation and trigger a capital reversal from developing economies, thereby prompting broad currency depreciation, including the rupiah. Such condition requires proper policy response to keep financial market yield in emerging countries interesting to investors.

The cumulative one percentage point hike of Indonesian central bank rates in three increments since May 17th offsets four prior 25-basis point cuts from June 2016 to September 2017. Rate tightening may not yet be over. ” Bank Indonesia will remain vigilant of the global financial market uncertainty, while continuing to stabilize the rupiah in line with the currency’s fundamental value and maintaining market mechanisms, backed by financial market deepening efforts.”

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



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