INDONESIA’S central bank stepped up its policy action with a bigger-than-forecast interest rate hike – the third increase in six weeks – to halt a deepening slide in the currency.
The seven-day reverse repurchase rate was raised by 50 basis points to 5.25% yesterday, surprising all of the 31 economists surveyed by Bloomberg, most of whom had predicted a 25 basis-points hike.
“The decision to increase the interest rate is another of Bank Indonesia’s (BI) pre-emptive, front-loading and ahead-of-the-curve measures to maintain the competitiveness of domestic financial markets following changes in monetary policy in a number of countries and high uncertainties in financial markets,” governor Perry Warjiyo says.
While inflation remains subdued and comfortably within the central bank’s 2.5% to 4.5% target, policy makers are squarely focused on stabilising the currency amid an emerging-market sell-off sparked by rising US interest rates. The rupiah has continued to lose ground against the dollar, dropping to as low as 14,415 yesterday to take its decline this year to over 5%.
Indonesia has been one of the hardest hit in Asia from the ructions caused in emerging markets by a surging greenback and US interest rates. That has seen other central banks take action to counter an exodus of capital. Central bankers from Turkey to India have raised rates in a bid to avoid a major crisis.
The rupiah gained as much as 0.6% against the dollar after the rate decision, while the benchmark Jakarta Composite Index rallied 2.3%. Yields on benchmark 10-year sovereign rupiah bonds fell 8 basis points to 7.82%, trimming this year’s rally to about 150 basis points.
“BI’s surprise 50 basis-point rate hike yesterday underscores Governor Warjiyo’s seriousness to get ahead of the curve and stem the depreciation pressure on the rupiah,” says Khoon Goh, head of Asia research at Australia & New Zealand Banking Group Ltd in Singapore.
“There should be no doubt in the market’s mind about the determination of the new governor to hike further if needed to defend the rupiah.”
Moving forward, Bank Indonesia will continue to monitor the domestic and global economic developments and outlook, to strengthen future policy mix responses. The loan-to-value ratio for property has been relaxed in order to maintain domestic economic recovery momentum and financial system stability. Global uncertainty also stems from the European Central Bank’s reduction in asset purchases, a lowering in China of reserve requirements, rising oil prices and deteriorating US-China trade relations.
“The uncertainty could feed through to broad US dollar appreciation and trigger a capital reversal from developing economies, thereby prompting broad currency depreciation, including the rupiah,” it says.
Warjiyo says the policy action is supported by intervention in the foreign exchange and bond markets to ensure sufficient liquidity. The central bank has drained US$9bil from its stash of foreign reserves since the end of January.
Still, the aggressive move also raises risks for Indonesia’s economic growth, which has been stuck around 5%, well below the 7% targeted by President Joko Widodo when he took office. The central bank yesterday announced measures to ease loan-to-value ratios to help spur lending and support a recovery in the economy.
“The rupiah is really a concern right now and they have realised the exchange rate volatility could be a lot more disruptive to the Indonesian economy than rising interest rates in the short term,” says David Sumual, chief economist at PT Bank Central Asia in Jakarta. — Bloomberg