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Can a BI 'preemptive strike' stop the rupiah depreciation?
The ongoing weakening of the rupiah is an anomalous occurrence, and the central bank might want to consider expanding its market operation as a "preemptive strike" to bolster the currency.
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An employee fans out US$100 banknotes on March 19, 2020 at a foreign exchange outlet in Jakarta. (Antara/Indrianto Eko Suwarso)
W
ith the United States inflation rate running at a four-decade high and its economy teetering into a recession, the US Federal Reserve is aggressively raising its rates at levels unseen since the mid-1990s as it struggles to tamp down soaring prices, which rose by an annual rate of 9.1 percent in June, the fastest since 1981.
So far, the Fed’s four rate increases during this year appear to have done little to rein in rising prices. Amid a tight labor market, low unemployment, snarled supply chain and trillion of dollars in social assistance the Biden administration has delivered into the hands of American consumers during the pandemic, inflation has been persistently high.
Meanwhile, Bank Indonesia (BI) decided at its board of governors meeting on July 20-21 to keep its benchmark rate at 3.5 percent, a rate it has maintained since June 2021.
The pressure on the rupiah is increasing as global portfolio investors adjust to tighter liquidity and rebalance their exposure from emerging countries, which are perceived to be at risk of rapid capital outflows.
According to BI, capital outflows from Indonesia reached US$2 billion in the first three weeks of July and in the year to July, non-residences have sold Rp 139 trillion ($9.5 billion) worth of government bonds.
The rupiah will suffer not only from the narrower rate differentials, but also from the continued strengthening of the dollar as the Fed’s hawkish shift triggers capital flows to the well-regulated and highly liquid US financial market, considered a safe haven by investors during global turmoil.
The greenback is up nearly 20 percent against a basket of major currencies, compared to its rate in June 2021. So strong is the dollar that the euro has been pushed down into parity for the first time since its creation. The British pound, Japanese yen and South Korean won have suffered double digit losses against the dollar.
