TheJakartaPost

Please Update your browser

Your browser is out of date, and may not be compatible with our website. A list of the most popular web browsers can be found below.
Just click on the icons to get to the download page.

Jakarta Post

BI may follow Fed’s step amid pressures

Bank Indonesia (BI) has hinted that the possibility remains for another increase in its benchmark interest rate to counter the risks of capital outflows as the United States’ Federal Reserve continues its hawkish move

Marchio Irfan Gorbiano (The Jakarta Post)
Jakarta
Mon, June 18, 2018

Share This Article

Change Size

BI may follow Fed’s step amid pressures

B

ank Indonesia (BI) has hinted that the possibility remains for another increase in its benchmark interest rate to counter the risks of capital outflows as the United States’ Federal Reserve continues its hawkish move.

BI Governor Perry Warjiyo said the central bank was ready to quickly respond to ongoing changes in the global economy, particularly those coming from monetary policy shifts in the US and Europe, as well as geopolitical risks.

“BI is ready to conduct preemptive, front-loading, ahead-of-the-curve policies to anticipate and mitigate external impacts to maintain economic stability, particularly the exchange rate stability,” Perry said recently in Jakarta.

In a widely expected move, the Federal Open Market Committee (FOMC) recently raised its policy rate — the Federal Funds Rate (FFR) — by 25 basis points (bps) to a range between 1.75 and 2 percent on the back of a favorable economy in the US.

The European Central Bank (ECB), meanwhile, has hinted that it will taper the amount of money it previously injected into the market during a quantitative easing program in September and end the policy completely by December this year.

BI will discuss the latest economic development and its policy stance during the monthly Board of Governors meeting, which is scheduled to be held from June 27 to 28.

BI raised its policy rate — the seven-day reverse repo rate — by a total of 50 bps at the end of May to the current level of 4.75 percent in a move to stem further depreciation of the rupiah, while leaving the door open for further hikes in the future.

“It looks like BI will raise the seven-day reverse repo rate again by another 25 bps this month after Perry’s hint [of a rate hike],” said Eric Sugandi, an economic observer at Asian Development Bank (ADB) Institute. “If it was undertaken, the hike would show that BI wants to be ahead of the curve before additional increases of the FFR.”

Eric said the possible policy rate increase at the upcoming BI meeting might be the last one the central bank would take in 2018 if the pressures on the rupiah eased off in the second half of this year. Another reason, he argued, was because inflation remained largely under the government’s target of 2.5 and 4.5 percent this year.

Meanwhile, Bhima Yudhistira Adhinegara, an economist at the Institute for Development of Economics and Finance (INDEF), projected that the rupiah might take a short-term hit during the period between the first trading session on June 21 after the long Idul Fitri public holiday and BI’s upcoming Board of Governors meeting on June 27. He cited increasing pressures on the emerging market following the Fed’s latest rate hike as the major factor.

If the domestic currency market had opened last Thursday, Bhima said the rupiah might have experienced the same fate as the Thai baht, which dipped slightly after the Fed rate increase.

“The rupiah would likely have weakened when the market opened after the Idul Fitri public holiday,” he said.

As the borrowing cost is predicted to increase this year amid the uptrend in the interest rate, businesspeople have been anticipating further hikes in BI’s policy rate considering the Fed’s hawkish move.

“We are already anticipating another rate hike, so it’s not a surprise,” said Rosan P. Roeslani, chairman of the Indonesian Chamber of Commerce and Industry (Kadin). “We could plan ahead for the cost of funds to rise. That’s okay, as long as we know in advance.”

Rosan projected that BI’s policy rate might go beyond 5 percent this year as the central bank still had room for two more hikes.

In response to that, Rosan said businesses would explore alternative sources of financing with more affordable rates other than the banking industry, citing capital market as an example.

Despite tightening its monetary stance, Perry said BI would remain supportive toward economic growth as it was preparing stimulus from instruments other than the policy rate. One example, he said, was macroprudential policy easing in the housing sector, which is said to be the leading sector to spur the whole economy.

“We are ready to relax the macroprudential policy, particularly LTV [loan-to-value ratio] to boost the housing sector,” he said.

The country’s GDP expanded by 5.06 percent during the first quarter of the year thanks to positive growth recorded in investment and household spending, according to data from the Central Statistics Agency (BPS). (ris/sau)

{

Your Opinion Matters

Share your experiences, suggestions, and any issues you've encountered on The Jakarta Post. We're here to listen.

Enter at least 30 characters
0 / 30

Thank You

Thank you for sharing your thoughts. We appreciate your feedback.