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n the last Federal Open Market Committee (FOMC) meeting on March 19, the US Federal Reserve (Fed) became more dovish than in previous months, despite removing the word '€œpatient'€ from its press release.

There is an indication that the pace of the US interest rate hike will not be as aggressive as expected at the beginning of the year.

The timing of the US interest rate hike looks likely to shift to the third or fourth quarter of this year from the initial consensus of the second quarter.

There is also a possibility that the rate hike may not start until next year. Our prediction is that the US interest rate will be raised in the fourth quarter at the earliest and by around 25 basis points (bps) or a maximum 50 bps.

As the pace of US economic recovery is still not solid, it makes sense that the need to raise the interest rate has weakened.

Raising the interest rate too soon would bring more risks than benefits and might even be fatal to the recovery.

The decision to raise rates will push the US dollar to strengthen against other currency rates. If the US dollar is too strong, it could hamper US manufacturing exports, as the goods will become less competitive and too expensive.

The larger difference between US interest rates and other countries will cause massive foreign fund inflows to the US economy to gain from higher investment return. This would cause the US dollar to substantially appreciate against other currencies.

We see that the unemployment level has declined quite significantly (from 10 percent in October 2009 to 5.5 percent in February 2015).

A drop in the unemployment level by 4.5 percentage points in the last five years seems fantastic, but we have to be careful in assessing the situation.

The decline in the unemployment level was not followed by a significant rise in income. The wage per hour did not improve and in fact slightly declined.

This indicates that the labor absorption in the US is mostly low-skilled, taken mostly by those who simply want to avoid unemployment. The weakness of the US income is also reflected in the decline in the savings level from 9.7 percent year-on-year basis in December 2012 to 7 percent in February.

Therefore, it is logical if the US domestic demand remains weak and retail sales decline, causing the Fed to lower economic growth predictions this year from 2.5-3 percent to 2.3-2.7 percent.

The possibility of the postponement in the US interest rate hike has been welcomed by market participants. Most of the currencies are strengthening against the US dollar, including the rupiah.

The rupiah strengthened fast to the level of Rp 12,935 per dollar last week from a worrying level of Rp 13,245 on March 17.

The postponement of the US interest rate hike could add to the uncertainty in the forex and financial markets. Fluctuations in and pressure on the rupiah could become more intense, while the space to speculate will become wider.

Some people may prefer a sooner rate hike in order to provide more certainty. A volatile and uncertain situation will complicate the economic calculations.

But Indonesia should take the time advantage to fix the Indonesian economy to become stronger in facing the external volatility.

This short space of time, no more than six to nine months, should be managed well and carefully. The weakening of the rupiah is a signal of how easy it is affected by the uncertainty in the global economic situation, including the US.

Thus, we need to address the structural problem of Indonesia as fast as we can. It is futile to expect the rupiah to strengthen if the economy is still overshadowed by the current account deficit, as it has been over the past three years.

Covering the deficit with short-term financial inflows (bonds and stocks) is not always healthy and mostly too risky, particularly with a very dominant foreign ownership in stocks (65 percent) and bonds (38 percent) in Indonesia.

With this condition, if there is negative sentiment in the domestic economy, the rupiah will be affected, as foreign investors tend to unload their rupiah assets, and the dollar supply will be disrupted since Bank Indonesia is usually the only supplier of dollars, while exporters and other market players tend to keep hold of dollars to maximize profits from the rupiah'€™s depreciation.

Therefore, the additional oxygen from the delay in the timing of the US rate hike should receive a positive response from the government with harmonized and consistent fiscal and monetary policy. We need short-term policies that can add to the supply of the dollar and reduce dollar demand domestically.

The fiscal policies recently announced will hopefully meet the needs of the forex market strengthen the rupiah. From the package of reform policies announced recently, the granting of visa-free facilities to tourists from 30 countries could have an immediate impact on the supply of dollars to the market through tourist spending.

Hence, the delay in the US interest-rate hike is a breath of fresh air. We should not, however, be complacent; we should accelerate the pace of our structural reforms to gear up the economy and the financial market for upcoming higher interest rates in the US.
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This short space of time, no more than six to nine months, should be managed well and carefully.
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The writer is chief economist at Bank Danamon. The views expressed are his own.