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Positive sentiments to help BI keep rate
Bank Indonesia (BI) is expected to hold its policy interest rate amid the positive domestic sentiments, so it still has room to increase the rate should volatility return, analysts have said
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span>Bank Indonesia (BI) is expected to hold its policy interest rate amid the positive domestic sentiments, so it still has room to increase the rate should volatility return, analysts have said.
The BI board of governors is scheduled to hold a two-day policy meeting from Wednesday to Thursday amid positive sentiments in several areas, including the rupiah’s current upward trend against the US dollar and recent growth in foreign exchange reserves.
The beginning of the year saw milder external pressures, with the US government shutdown lasting more than three weeks and the US Federal Reserve easing its policy rate hikes to twice this year, compared to four hikes in 2018.
BI data reveals that the favorable environment had led to Rp 6.8 trillion (US$481.76 million) of foreign capital inflow in the first two weeks of January toward Indonesian assets like sovereign debt papers (SBN), stocks and corporate bonds.
The rupiah was trading at 14,154 per US dollar according to the Jakarta Interbank Spot Dollar Rate (JISDOR) on Wednesday, slightly lower than 14,084 the day before, but significantly stronger than the 2019 state budget’s assumption of Rp 15,000 per US dollar.
Gadjah Mada University (UGM) economist A. Tony Prasetiantono believed that there was no urgent need for the central bank to raise its policy rate amid the positive sentiment in early 2019, while the 2018 inflation remained under control within BI’s target range and an increase in forex reserves to $120.65 billion.
“In the current position, it will be counterproductive to raise interest rates when the pressures on the rupiah are moderate,” said Tony, likening the scenario to “shooting bullets at an invisible enemy”.
Center of Reform on Economics (CORE) Indonesia research director Piter Abdullah Redjalam shared Tony’s view that BI could refrain from imposing a rate hike in January. He also emphasized that the central bank still had room for future hikes if volatility returned to the rupiah.
“Although the Fed [policy] is slightly dovish, I believe BI will not follow this stance,” said Piter, adding that the rupiah was still vulnerable, particularly to the persistent trade deficit.
The trade deficit widened to $8.57 billion in 2018, the largest recorded deficit since 1975. Exports rose 6.65 percent year-on-year (yoy) while imports grew 20.15 percent yoy.
Taking into account the latest figures, Bahana Sekuritas economist Satria Sambijantoro said that the current account deficit had widened to 3.1 percent of GDP in 2018, slightly higher than the 3 percent threshold of the central bank had set.
A deficit in the current account means that a country is spending beyond its means of foreign exchange, which required the country to rely on foreign portfolio investments to fulfill its forex needs.
The central bank raised its benchmark 7-Day Reverse Repo Rate by 175 basis points (bps) to bring the rate to its current 6 percent level in a hawkish move intended to maintain rupiah stability and to assert the attractiveness of Indonesia’s financial assets.
BI Governor Perry Warjiyo often reiterated that the bank’s monetary policy stance regarding its reference rate was in accordance with the concerted effort of monetary and fiscal authorities to narrow the current account deficit to provide a more stabile platform for the rupiah.
The bank’s data shows that 98 percent of exporters in October were compliant in reporting their export earnings, but only 15 percent of earnings had been converted into rupiah.
The government had earlier announced that it would incentivize storing export earnings in domestic banks by cutting the deposit tax for exporters of certain commodities.
Samuel Sekuritas economist Lana Soelistianingsih said that a larger portion of repatriated revenues from exporters would provide additional buffer for the rupiah, without the central bank needing to frequently increase its key rate.
