The rupiah and share prices closed higher on Thursday as the financial markets responded positively to the central bank’s move to raise its benchmark interest rate by 50 basis points to 7 percent.
After the Bank Indonesia (BI) rate hike, the Jakarta Composite Index (JCI) climbed 1.9 percent to 4,103.59, having previously plummeted to a 12-month low of 3,967.84 earlier this week. Top gainers included PT Astra International (ASII) which rose 4.5 percent and PT Telekomunikasi Indonesia (TLKM) which rose 3.5 percent
Globally, the JCI was the third-best performing stock market on Thursday after the Philippines PSE Index, which was up 3.6 percent, and India’s S&P Sensex, which rose 2.2 percent, according to the World Benchmark Indices Comparison data compiled by the Indonesian Stock Exchange
Meanwhile, the rupiah strengthened, reaching 10,919 per US dollar on Thursday, before closing at 10,935, prices from local banks compiled by Bloomberg show. The yield for 10-year government bonds was little changed at 8.73 percent, according to prices from the Inter Dealer Market Association.
BI raised the BI rate to a four-year high in an extraordinary board of governors meeting, the first time in decades that the central bank has held two monetary meetings in one month, according to BI data.
“We want to focus on promoting short-term stability in our financial markets,” BI spokesperson Difi Johansyah said.
The 50-basis point hike in the BI rate was the right dosage to buffer the country against capital outflows, as anything less than that “might not be sufficient”, Difi said. “It’s also a signal that BI wants to make rupiah assets attractive,” he added.
The central bank had kept the BI rate unchanged in its monetary meeting on Aug 15, but the recent steep decline in the rupiah and bleak inflationary outlook meant that BI had to return to monetary tightening mode, economists said.
The rupiah — which hit a four-year low this week — is now among the region’s worst-performing currencies as it has declined 11.9 percent this year, while inflation is forecast to rise to between 9 percent and 9.8 percent by year’s end, according to revised BI data.
The 50-basis point interest-rate hike was “an encouraging move as it shows that BI is starting to recognize the nature and scale of the challenge,” said Richard Jerram, the chief economist of Bank of Singapore Ltd.
Besides raising the BI rate, the central bank’s board of governors led by Agus Martowardojo also jacked up the overnight facility rate (Fasbi) by 50 basis points to 6 percent, and increased the lending facility rate by 25 basis points to 7 percent.
BI also decided to shorten the minimum holding period for short-term promissory note (SBI) debt papers from six months to one month in a move that could attract foreign funds, though such “hot money” carries the risk of increasing volatility in the economy.
BI also signed an extension of the bilateral swap arrangement (BSA) with the Japanese central bank over access to $12 billion of cash as part of the Chiang Mai initiative, as the agreement was due to lapse on Aug. 31. The agreement allows the two countries to borrow from each others’ foreign exchange reserves.
Major banks said that the increase in the BI rate would slow their lending growth as borrowers would face higher lending costs.
Bank Mandiri president director Budi Gunadi Sadikin signaled that the state-owned bank might opt to delay increasing its credit rate, due to concerns about rising non-performing loans. “Raising the credit rate increases the possibility of seeing more non-performing loans. So we will discuss whether or not the rise is strictly necessary. We would rather see reduced [profit] margins than higher non-performing loans,” he said.