Indonesia's New Central Bank Governor Pledges Focus on Rupiah Stability


MAY 24, 2018

Jakarta. Indonesia's newly sworn in central bank governor on Thursday (24/05) promised to use interest rate policy to stabilize the rupiah currency in the near term and to be "more pre-emptive" and ahead of the curve on monetary settings.

The rupiah has been among the worst performers among Asian currencies this year, losing more than 4 percent of its value, as investors slash their holdings in emerging markets in response to rising US Treasury yields.

"My priority in the short term is to strengthen steps required to immediately stabilize the rupiah exchange rate," Governor Perry Warjiyo told reporters at a news conference after his inauguration.

Earlier on Thursday, the rupiah hit its weakest level since October 2015 of 14,210 per dollar, before edging up to 14,160 after the statement by the new Bank Indonesia (BI) governor.

The main monetary policy rate and "dual intervention" of selling dollars and buying government bonds would be the main tools to shore up the rupiah, Perry said. So far this year BI has bought Rp 50 trillion ($3.54 billion) of government bonds from foreign sellers with most of the operations done in the past month, he said.

BI raised its key rate by 25 basis points to 4.50 percent last week, the first hike since November 2014.

When the rupiah extended falls the next day, outgoing governor Agus Martowardojo, said BI would be prepared to raise rates further.

Perry reiterated his predecessor's view that the current weakness in the rupiah was due to external factors.

He said Southeast Asia's largest economy had sound fundamentals, predicting economic growth at 5.2 percent this year, with an inflation rate near the midpoint of BI's target range and a current account deficit under BI's healthy threshold.

The central bank will hold a meeting with bankers and businesses, who use foreign currencies, to convey BI's commitment to support the rupiah, Perry said.

Such a meeting could prevent market from "overshooting the currency", he said.

The new BI governor sought to draw a distinction between Indonesia and some other emerging markets, where there has been concern in the market about politicians meddling in policies.

While BI was working with the government and other regulators, President Joko "Jokowi" Widodo had pledged to uphold BI's independence, he said.

Investors have sold the Turkish lira on concerns that its president would seek to influence monetary policy settings, forcing the central bank to raise interest rates by 300 basis points in an emergency move on Wednesday.

In a bid to calm concerns about how policy makers can support economic growth, Warjiyo said BI would balance its monetary policy tightening with looser macroprudential rules and efforts to deepen financial markets and improve payment systems.

Indonesia's GDP growth was 5.06 percent in the first quarter, below market expectations, and some analysts have said further tightening could choke economic activity.

"When we raise interest rates, it doesn't mean growth would slow immediately. The impact to growth will lag 1.5 years," Perry said. "Meanwhile, the volatility in the currency will probably only last a quarter."

Josua Pardede, an economist with Bank Permata in Jakarta, said he believes Warjiyo, who is an experienced central banker, "will be extra careful with the interest rate instrument" given the effects rate movements have on bank lending rates.

"If the pressure on the rupiah continues, there is a probability of another 25 basis points hike before the end of the year," Josua said.