Bank Indonesia Underscores Hawkish Stance With Rate Hike to Aid Rupiah

Indonesia's central bank on Wednesday (15/08) raised its benchmark interest rate for the fourth time since mid-May. (Antara Photo/Sigid Kurniawan)

By : Reuters | on 3:51 PM August 15, 2018
Category : Business, Economy, Featured

Jakarta. Indonesia's central bank on Wednesday (15/08) raised its benchmark interest rate for the fourth time since mid-May, unleashing new firepower to defend a rupiah currency under renewed pressure as Turkey's financial crisis ripples across emerging markets.

Bank Indonesia (BI) raised its seven-day reverse repurchase rate by 25 basis points to 5.50 percent, as expected by 7 of 19 economists in a Reuters poll, giving the rupiah an immediate leg-up.

"The reason for the rate hike is to maintain the attractiveness of our domestic financial market, in that we want yields ... to remain attractive despite rising risk premiums and that could trigger inflows," BI governor Perry Warjiyo told a news conference.

The rupiah lost about 1 percent of its value against the dollar on Monday amid a wide emerging market sell-off spurred by investors' fears of contagion from Turkey's crisis.

The currency remained under pressure up until BI's decision. After Wednesday's announcement, the rupiah strengthened to around 14,585 per dollar, after hitting 14,646, the weakest since October 2015, earlier in the day.

Perry said BI was continuing to monitor developments in Turkey, although he sought to reassure markets, saying Indonesia's economy was resilient.

Between mid-May and the end of June, BI hiked interest rates three times totaling 100 basis points, including at an off-cycle meeting. It kept rates steady at its July meeting.

Acknowledging its monetary policy could hurt growth, BI lowered its outlook for economic growth this year to a range of 5.0-5.4 percent from 5.1-5.5 percent. Annual GDP growth in the second quarter was 5.3 percent.

BI has also spent billions of dollars of foreign exchange reserves to defend the rupiah. BI said its reserves level was more than adequate to maintain stability.

Economists at Bahana Sekuritas-Daiwa said that despite already high real interest rates "when the markets move irrationally, a tighter monetary policy could be a safe insurance against further threats of capital outflows."

Andry Asmoro, economist at Bank Mandiri, said Wednesday's decision should be seen as part of "a continuous effort to maintain domestic financial market attractiveness against a backdrop of high global uncertainty."

Some economists think BI is not done raising rates. Bank Danamon's economist Wisnu Wardana predicted one more hike this year of 25 bps.

When asked about room to raise rates, Perry said future decision would be data dependent and that the central bank's stance remained hawkish.

To enhance the effectiveness of rate hikes, Perry said BI will put more efforts on market deepening by introducing instruments like overnight index swap and interest rate swap.


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