Rupiah headwinds blow as policy makers prepare for rate decision

MUMBAI: This week may prove to be a crucial one for the Indonesian rupiah.

As Wednesday’s policy decision approaches, Bank Indonesia finds itself under pressure to raise the benchmark rate again even after increasing it by a combined 100 basis points since mid-May to stem a slide in the currency.

Rupiah headwinds have steadily increased in recent weeks and now include a current-account deficit threatening to widen, political uncertainty before next year’s elections, rising global trade tensions, a Turkeycentered slide in emerging markets, and a dollar rally fuelled by a hawkish Federal Reserve.

The central bank’s first line of defense will remain hiking rates, according to Mizuho Bank Ltd and Australia & New Zealand Banking Group Ltd.

“We expect that Bank Indonesia will probably be at risk of tightening in the interest of financial and FX stability again when volatility and capital outflow pressures pick up,” said Vishnu Varathan, head of economics and strategy at Mizuho Bank in Singapore. “These risks may increase into September-October as U.S.-China trade talks come to a head and global liquidity withdrawal steps up.”

Policy makers will probably raise the seven-day repurchase rate by another 25 or 50 basis points to buy more insurance for the rupiah, Varathan said, without giving a time frame.

Bank Indonesia has also been utilizing its foreign-exchange reserves in its battle with currency bears. The stockpile dropped for a sixth month in July to US$118.3bil from US$132bil in January.

The rupiah’s recent stability means the central bank can claim its policies have been a success. The currency has been little changed since sliding to an almost three-year low in July. Overseas investors snapped up a net US$54mil of local stocks last month after offloading a combined US$3.7bil the previous five months, and bought 9.1 trillion rupiah (US$629mil) of bonds.

Khoon Goh, head of Asia research at ANZ in Singapore, sees the rupiah strengthening to 14,000 per dollar by year-end, from Friday’s closing level of 14,475. The consensus forecast is for a far more modest gain to 14,400.

ING Groep NV remains bearish. There may be some more policy tightening in the second half and coupled with a probable worsening of the trade war, that could lead to some moderation in economic growth, said Prakash Sakpal, an economist at ING in Singapore.

The rupiah will probably weaken to 14,660 per dollar by year-end, he said.