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How global interest rate cuts will impact on Indonesia
While the ongoing global monetary easing is expected to have a positive impact on Indonesia's economy, stakeholders still need to remain mindful of certain risks and take preventive measure to maintain rupiah stability, enhance domestic liquidity and control inflation.
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A clerk counts United States banknotes on May 22, 2024, at a money changer in
Jakarta. (Antara/Rivan Awal Lingga)
U
nited States Federal Reserve Chair Jerome Powell on Aug. 23 delivered a keynote address at the annual gathering of central bankers and economists in Jackson Hole, Wyoming, stating, "The time has come for policy to adjust."
This statement reinforces the dovish stance the Fed is expected to adopt by lowering its benchmark interest rate in the upcoming Federal Open Market Committee (FOMC) meeting.
This sentiment was previously echoed by San Francisco Fed President Mary Daly, Chicago Fed President Austan Goolsbee, and Minneapolis Fed President Neel Kashkari. They separately hinted at the possibility of a Fed rate cut in September, underscoring the need for careful attention to the current US economic conditions, particularly the rising uncertainty in the labor market.
This concern follows a sharp increase in unemployment and a rise in the Sahm Rule index, a recession indicator in the US, along with its potential impact on inflation.
Meanwhile, the global trend of interest rate cuts began with the Bank of Canada’s decision to lower rates by 25 basis points (bps) on June 5. This trend gained momentum when the Reserve Bank of New Zealand, known for pioneering the Inflation-Targeting Framework now used by most central banks, cut its benchmark interest rate by 25 bps on Aug. 14, marking its first reduction since March 2020.
The expectation of a Fed rate cut and concerns about a deteriorating US labor market have led to a significant decline in the US Dollar Index (DXY) since early August.
On Aug. 23, the DXY reached its lowest level in the past 13 months. As a result, despite the lack of significant improvement in fiscal conditions and the current account balance—two fundamental concerns for any currency—there has been a strong appreciation of various currencies against the US dollar.
