Indonesia must raise interest rates ahead of the United States Federal Reserve to avoid 'drastic' capital outflows, the central bank governor, Perry Warjiyo, said on Wednesday (03/10). (Antara Photo/Hafidz Mubarak A)

Bank Indonesia Governor Signals Need to Hike Rates Ahead of Fed Increases

BY : MAIKEL JEFRIANDO

OCTOBER 03, 2018

Jakarta. Indonesia must raise interest rates ahead of the United States Federal Reserve to avoid "drastic" capital outflows, the central bank governor said on Wednesday (03/10).

The comments appear to open the door for another Indonesian rate rise before mid-December when the Fed is expected to increase US rates for the fourth time this year.

"When we know that the Fed Funds rate will increase, we cannot wait. We have to act first so that the capital reversals will not be drastic," Bank Indonesia Governor Perry Warjiyo told a seminar organized by Golkar Party.

The governor said the Fed will probably hike one more time this year, then twice in 2019. The Fed, when last week making 2018's third hike, said it sees a December increase, three next year and one in 2020.

Bank Indonesia has raised interest rates five times since mid-May by a total of 150 basis points and intervened in the currency market to help the rupiah and reduce volatility.

Perry's remarks came after the rupiah on Wednesday hit 15,090 a dollar, its weakest in over 20 years, as investors returned to safe-haven assets following a rise in oil prices and the striking of a revised North American trade pact.

The governor said the rupiah's 10 percent drop against the dollar this year was a better performance than that of some other currencies.

Current-Account Gap 

Perry said the interest rate hikes, done in the absence of domestic price pressures, were intended to attract portfolio investment. In September, the annual inflation rate cooled to its lowest in over two years.

"I don't like raising rates, but if the outflows are this heavy, then we must do it," he said, adding that higher interest rates would also work to reduce Indonesia's current-account deficit.

Higher interest rates and a weaker exchange rate could affect domestic demand for imported goods, which would reduce the current-account gap.

The government has raised import tariffs, widened biodiesel use and delayed billions of dollars of infrastructure projects to cut import bills.

In the second quarter, Indonesia's current-account deficit was its widest in nearly four years, at 3 percent of the gross domestic product.

The deficit was 1.7 percent of GDP in 2017. Bank Indonesia has forecast the gap to rise to somewhere below 3 percent this year, then narrow to about 2.5 percent in 2019.

Pressure on the rupiah may ease next year because of the smaller deficit and fewer US rates increases, Perry said.

Reuters

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