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Rate hike could attract capital, BI says
Bank Indonesia (BI) has hinted that it is open to the possibility of raising its benchmark interest rate to strengthen the rupiah, while expecting capital inflows to start returning to the domestic financial market
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ank Indonesia (BI) has hinted that it is open to the possibility of raising its benchmark interest rate to strengthen the rupiah, while expecting capital inflows to start returning to the domestic financial market.
The central bank is scheduled to hold a two-day board of governors meeting on June 27 and 28, in which it would make a decision on its policy rate — the seven-day reverse repo rate — which now stands at 4.75 percent.
“Bank Indonesia’s short-term focus is to maintain economic stability, particularly when it comes to the rupiah,” BI Governor Perry Warjiyo said at a halal bihalal (Idul Fitri gathering) in Jakarta on Friday. “This is why we are ready to be preemptive, front-loading and ahead of the curve in responding to the latest policy [...] from the [United States] Federal Reserve and the ECB [European Central Bank].”
Perry said he was optimistic that a policy rate hike would help maintain economic stability and strengthen confidence among foreign investors, prompting funds to come back after significant outflows in the past few months.
“We believe our monetary policy will attract foreign investors to the [Indonesian] financial market, therefore we project that foreign capital, particularly [from investment in] sovereign bonds, will come back [to Indonesia],” he said.
A return of funds, Perry said, would result in an increase in foreign exchange supplies in the domestic market and therefore strengthen stability of the rupiah going forward.
At the same time, Perry reiterated BI’s commitment to stimulating economic growth through planned relaxations on the loan-to-value (LTV) ratio in the property sector and indent and payment terms for mortgage.
Gadjah Mada University economist Tony Prasetyantono said the easing of LTV regulations was needed to encourage demand for bank loans, which grew at a sluggish rate, against the backdrop of BI’s tightened monetary policy.
“The LTV [relaxation] is a ‘buffer’ to soften [the impact] of the interest-rate hike policy, particularly for credit expansion,” he said.
Loan growth was recorded at 8.5 percent year-on-year (yoy) in March. BI’s loan disbursement is expected to expand by 10 to 12 percent this year.
BI has twice raised its policy rate by a total 50 basis points (bps) to stabilize the rupiah against a stronger US dollar, stating that its current policy stance was “tight bias” at its latest board of governors meeting on May 30.
The rupiah was traded at Rp 14,102 per US dollar on Friday, according to data from the Jakarta Interbank Spot Dollar Rate (JISDOR), weaker than the Rp 14,090 seen a day earlier — the first trading day after the Idul Fitri public holiday — as investors played catch up to the latest international developments.
BI has spent around Rp 15 trillion (US$1.06 billion) year-to-date to defend the rupiah, which depreciated by 2.3 percent over the same period, according to BI data.
The US Federal Open Market Committee (FOMC) recently hiked its interest rate — the Federal Funds Rate — by 25 bps to bring the rate to between 1.75 and 2 percent on the back of favorable domestic conditions in the world’s largest economy.
It was the Fed’s second rate hike this year as it hinted at a hawkish stance, projecting another two rate hikes within this year.
The ECB, meanwhile, is about to end its crisis-era bond purchasing program, better known as quantitative easing, in December this year and promised not to raise its policy rate until mid-2019.
“As long as the rupiah [exchange rate] remains volatile, BI will always be in the market,” said Nanang Hendarsah, BI’s head of monetary management, referring to the central bank’s strategy of dual intervention in currency and secondary bond markets.
Piter Abdullah, research director at the Center of Reform on Economics (CORE) Indonesia, said BI was likely to hike its policy rate on June 28 as the rupiah fell to above Rp 14,000 after the Idul Fitri holiday. He said it would be “risky” if the central bank stood pat.
In order to mirror the Fed’s trajectory, Piter projected that two additional rate hikes to reach 5.5 percent were possible this year as such a level would be favorable for the economy.
