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BI interest rate hike imminent
Bank Indonesia (BI) is expected to make good on its promise to end its expansionary monetary policy by raising its interest rate on Thursday in response to external pressures that have hit the rupiah hard, analysts have said
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ank Indonesia (BI) is expected to make good on its promise to end its expansionary monetary policy by raising its interest rate on Thursday in response to external pressures that have hit the rupiah hard, analysts have said.
Following the rupiah’s recent depreciation, the central bank has sent a strong message that it has ample room to adjust the BI seven-day reverse repo rate if it deems the depreciation could harm its inflation target.
In the last two years, the central bank has lowered its policy rate by 200 basis points to the current level of 4.25 percent as a stimulus to stir GDP growth. The current rate has stood unchanged since September 2017.
The rupiah traded at Rp 14,094 per US dollar on Wednesday, according to the Jakarta Interbank Spot Dollar Rate (JISDOR), slightly depreciating from Rp 14,020 seen a day earlier and far from the Rp 13,400 seen at the beginning of the year.
Bank Central Asia (BCA) chief economist David Sumual said an interest-rate hike was vital to anchor inflation to within the government’s target of between 2.5 percent and 4.5 percent this year.
“[With an interest-rate hike] the central bank is expected to anchor its inflation expectation, which could potentially run loose if there is no reaction from the monetary side,” he said.
The central bank’s governors are scheduled to announce its policy rate for May on Thursday following a two-day board of governors meeting, which began on Wednesday. It is also expected to announce its new monetary stance and policy mix in response to the latest development.
BCA’s David also said BI’s interest-rate hike was vital as other neighboring countries such as Malaysia and the Philippines, among others, had adjusted their interest rate following the United States’ Federal Reserve’s interest-rate increase in March.
He said external pressures, particularly amid speculation over the Fed’s interest-rate increase, would force more BI interest-rate hikes throughout the year.
Samuel Asset Management economist Lana Soelistianingsih projected the central bank would raise its interest rate by 25 basis points on Thursday, while concurring with BCA’s David that more hikes were possible in the near future as external pressures had yet to show signs of receding.
“The expectation is that this will not be the only [BI] interest-rate increase and will be followed by further [increases],” she said, citing some of the geopolitical risks, such as talks between the US and North Korea, as well as the US’ trade war sentiments with China as other external pressures besides the Fed’s interest-rate hike this year.
Ongoing external pressures have pushed foreign investors in Indonesia to place their assets elsewhere, as the foreign investors recorded a net sell of about US$2.8 billion in stocks this year, according to data from Bloomberg. Indonesia’s sovereign bonds also recorded a net outflow of $2.3 billion since the end of March, Bloomberg data has shown.
Securities firm Binaartha Sekuritas analyst Reza Priyambada said market players had perceived significant uncertainty in Indonesia’s economy, especially in its trade-balance deficit in April after it recorded a surplus beforehand.
The Central Statistics Agency (BPS) reported on Tuesday a trade deficit of $1.63 billion last month, same as in the first two months of 2018, despite booking a $1.09 billion surplus in March.
“This raises questions [among market players] as they thought the government was committed to revitalizing import dependency,” said Reza. “This kind of panic will affect the state budget with its macroeconomic assumptions that just keep on missing.”
The anticipation over possible changes to BI’s policy rate was also influencing the market, he added, saying that even if BI decided to raise it, the move would only temporarily strengthen the rupiah, while both credit growth and market activities would likely be curbed.
Furthermore, improving macroeconomic conditions in the US had caused investors to turn their heads to US dollar-based equity, further worsening the rupiah’s performance. At the same time, the Jakarta Composite Index (JCI) has become more exposed to the dollar amid surging imports by domestic manufacturers.
Separately, Narada Asset Management research analyst Kiswoyo Adi Joe expressed confidence that the dollar would not become as strong as many had projected.
“The US might show better inflation rates but it seems that their other economic indicators were not as good, so there is a possibility for the Fed to hold back from raising its rate,” Kiswoyo told The Jakarta Post by phone on Wednesday evening.
The Fed maintained its benchmark rate earlier in May despite hints of further increases this year, indicating that there were conditions holding the Fed back from consecutively pushing the rate up, said Kiswoyo.
He said he was optimistic spending would grow in the second quarter of the year, boosted by Idul Fitri and the regional elections.
