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BI tightening will not hurt much, at least not yet: Analysts
Bank Indonesia’s recent interest rate hike signals the first step toward a tighter monetary policy that would put pressure on corporate bonds.
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The Bank Indonesia (BI) logo is displayed on a gate to the central bank’s premises in Jakarta on Sept. 2, 2020. (Reuters/Ajeng Dinar Ulfiana)
B
ank Indonesia’s (BI) recent interest rate hike signals the first step toward a tighter monetary policy that would put pressure on corporate bonds, analysts say.
While the 25-basis-point (bps) increase – the first since 2018 – did not come as a shock to markets, it is widely expected to be just the beginning of several hikes this year, which together would have a significant impact on banks, consumers and corporations.
Maximilianus Nicodemus, associate director of research at Pilarmas Investindo, told The Jakarta Post on Wednesday that the rising cost of funds would be particularly challenging for firms seeking to refinance their debt or those that had a high degree of exposure to global economic risks.
He added that the impact would be greater if, as many anticipate, BI hiked its benchmark rate by a total of 100 bps this year.
A higher benchmark rate, in principle, would drive up yields on government bonds and on much riskier corporate bonds. It would prompt companies to adjust their rates, so as to remain attractive to investors and continue to borrow money, albeit at a higher cost of funds.
“At this stage, firms may want to consider finding alternative sources of financing, as issuing bonds may become more difficult,” Nicodemus said.
BI raised its benchmark seven-day reverse repo rate (7DRRR) from 3.5 to 3.75 percent on Tuesday in a bid to anticipate rising core inflation driven by higher prices of fuel and certain food commodities.
