G

lobal financial markets are anticipating whether the United States’ Federal Reserve (Fed) will take a hawkish stance with more rate hikes lined up this year under its new chairman Jerome Powell, leaving central banks worldwide looking to find the best way to balance their monetary tasks.

The Fed was scheduled to announce its latest policy statement on Wednesday at 2 p.m. US local time on the back of a projection of better US economic data following President Donald Trump’s expansionary moves to cut taxes and increase government spending.

Market players closely monitored key talking points in the Fed’s policy statement on whether it would increase its fund rate more than three times this year as Powell had hinted in February, said PermataBank economist Josua Pardede.

Josua said a clearer statement on the Fed’s rate trajectory this year would reduce uncertainty in global markets that had triggered currency volatility, particularly in emerging economies, leaving possible room for a short-term appreciation of the rupiah.

“If the Fed raises its interest rate three times and the markets are well informed, there may be room for the rupiah to appreciate,” he said, adding that more than three rate hikes this year would not severely affect the rupiah as it would likely stay at the current level of Rp 13,700 per US dollar.

Maybank Indonesia economist Myrdal Gunarto voiced a similar opinion that there might be room for rupiah appreciation after external pressure eased. However, the currency would still face risks from a possible rise in inflation during the Idul Fitri festivities in June and another potential Fed rate hike.

With more global certainty, Josua of PermataBank said the current Bank Indonesia (BI) benchmark interest rate — the seven-day reverse repo rate — at 4.25 percent would be a sufficient cushion against the risk of capital outflows.

BI is scheduled to announce its decision on its policy rate on Thursday after a two-day board of governors meeting against the backdrop of the need to balance its monetary measures between managing stability amid global risks and helping Indonesia’s economy to grow faster.

BI would probably continue to keep its rate unchanged throughout 2018 after cutting 200 basis points (bps) last year, but it was feared a more hawkish Fed could trigger outflows and force BI to raise its interest rate by 25 bps, said Myrdal of Maybank Indonesia.

In Wednesday’s trading session, the Jakarta Composite Index (JCI) — the main gauge of the Indonesia Stock Exchange (IDX) — increased by 1.11 percent to 6,312.83. The rupiah, meanwhile, was relatively stable at Rp 13,750 per US dollar.

I Made Adi Saputra, MNC Sekuritas fixed-income analyst, said the government should pay more attention to the rupiah volatility as the risk of capital outflows from emerging markets still lingered.

“The Indonesian bond market has begun to recover from the shock in February and March, but if the rupiah keeps weakening to a level lower than Rp 13,800 [per US dollar], our bond yields will not be interesting enough for global investors, prompting them to leave Indonesian securities,” he said.

As there would be little room for monetary easing through rate cuts this year, Indonesian central bankers and policy-makers should work together to combine an array of policies to boost the country’s economic growth while safeguarding financial stability, said David Sumual, Bank Central Asia chief economist.

The government is eyeing an economic growth target of 5.4 percent this year, higher than the 5.2 percent outlined in the 2017 revised state budget.

Indonesia’s gross domestic product (GDP) grew by 5.01 percent year-on-year (yoy) in the first quarter of 2017 as a result of a slowdown in consumer spending, leaving overall economic growth at 5.09 percent yoy throughout the year.

“We need to have a multi-policy [approach] not only relying on monetary policy, but also fiscal and structural issues because from the demand side, we still need stimulus to grow further,” he said.