Central Bank Intervenes to Prop Up the Rupiah

Bank Indonesia 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. (ID Photo/David Gita Roza)

By : Adinda Normala | on 10:39 PM March 01, 2018
Category : Business, Banking/Finance

Jakarta. Bank Indonesia intervened in the currency market on Thursday morning (01/03) to support the rupiah after it touched a level that did not reflect its fundamentals, a senior director at the central bank said.

The rupiah weakened to 13,793 against the United States dollar on Thursday morning, from 13,707 the day before, according to Bank Indonesia data. The local currency briefly touched 13,800 – the lowest since February 2016.

"The rupiah was too weak, as it should be stronger if we look at the improvement in the domestic economic condition," Doddy Zulverdi, a director at Bank Indonesia's monetary management department, told reporters.

The rupiah exchange rate hovered around the 13,755 level and closed at 13,793 on Thursday afternoon.

Rupiah volatility reached 8.3 percent since the beginning of the year, but "this is not too bad, compared with other countries," said Doddy, who cited 9.7 percent volatility in the Chinese yuan and 9 percent volatility in the South Korean won as examples.

According to Doddy, the two main factors causing a weakening in global currencies are US data, which reflects a growing economy, and a speech by US Federal Reserve Chairman Jerome Powell, in which he indicated that inflation may rise, which would prompt hikes in the federal fund rate.

In his speech to the US Congress, Powell expressed optimism about the country's economic recovery and said monetary measures should be taken to prevent an "overheating" economy by adjusting interest rates. Market players responded to the Fed's hawkish gesture by releasing assets in the currencies of developing countries, including Indonesia, Doddy said.

However, an improving domestic economy is expected to counteract rupiah depreciation, especially if inflation remains within Bank Indonesia's 2.5 percent to 4.5 percent target range.

The inflation rate was 3.61 percent last year, which was within the 3 percent to 5 percent target. It stood at 3.18 percent last month, the lowest since December 2016.

"We hope the rupiah will strengthen as global uncertainties end, thus helping the overall economy," Doddy said.

Meanwhile, the government will monitor rupiah movement in the market, especially its impact on the 2018 state budget, which has been based on a presumption of an exchange rate of 13,400 to the dollar.

"The government will monitor developments in the exchange rate on a regular basis," Askolani, director general for budgeting at the Ministry of Finance, told the Jakarta Globe. He added that the government would take the necessary measures, if needed.

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