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Do we need further monetary tightening?

Bank Indonesia (BI) recently raised its seven-day reverse repo rate by 25 basis points to 6 percent despite the recovery of the Indonesian currency, which declined significantly in October.

Arisyi Raz (The Jakarta Post)
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Jakarta
Tue, November 27, 2018

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Do we need further monetary tightening? Bank Indonesia (BI) continues to look for the right formula to deal with growing uncertainty in the financial sector. (Shutterstock/File)

B

ank Indonesia (BI) recently raised its seven-day reverse repo rate by 25 basis points to 6 percent despite the recovery of the Indonesian currency, which declined significantly in October. This policy rate hike, the sixth one this year, has surprised the market. A Bloomberg poll showed only three out of 31 analysts predicted BI would raise it again. In line with the policy rate hike, the central bank also boosted its deposit and lending rates by the same extent to 5.25 and 6.75 percent, respectively.

The market, including Indonesia’s largest banks, did not expect such a raise as the rupiah has been doing well during the month. The rupiah rose to 14,787 per US dollar on Nov. 14 (a day prior to the rate hike announcement) from 15,203 on Oct. 31. While inflation in October stood at 3.16 percent, safely within the inflation target of 3 percent (plus or minus 1 percent). The economy also grew above 5 percent in the third quarter.

The BI argued such a policy hike was aimed at anticipating the potential worsening of the current account deficit. In the third quarter, the deficit was recorded at US$8.8 billion (3.37 percent of gross domestic product) from $8 billion (3.02 percent of GDP) in the previous period. This translates to a cumulative deficit to 2.86 percent of GDP from January to September, which almost reached a “safe limit” of 3 percent.

The central bank further stated the hike had factored in global financial uncertainties, including expectated high inflation in the United States — which may trigger further US Federal Reserve rate hikes before the end of the year – economic slowdown in Europe, and economic downturn in China because of deleveraging in the financial system and the escalating trade war with the US.

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