BI raises its key rate again to strengthen weak rupiah
JAKARTA: Indonesia’s central bank raised its benchmark interest rate for the second time in two weeks yesterday and flagged more possible hikes as it escalated a battle to boost the fragile rupiah and contain capital outflows.
Bank Indonesia’s new governor, Perry Warjiyo, pledged more action to promote financial and economic stability to bolster Indonesian assets amid an emerging market sell-off.
“The central bank will continue to calibrate global and domestic market developments to utilise room for further rate hikes in a measured way,” he told reporters after the board of governors, at a special meeting, lifted the key rate by 25 basis points to 4.75%.
On May 25, one day after being swornin for a five-year term, Warjiyo called the off-cycle meeting. On May 17, BI raised its key rate by 25 basis points to shore up the rupiah, then trading at its weakest since October 2015.
Warjiyo, who was not always reading verbatim from the policy statement, called the hike “pre-emptive, front-loading and an ahead of the curve step” in response to expectations of higher US interest rates.
Rahul Bajoria, an economist in Singapore for Barclays, said the two hikes in two weeks “very forcefully signals to the market that the new governor is very serious about maintaining financial stability.”
Stephen Innes, head of Asia-Pacific currency trading at OANDA, said the decision signalled “currency first and nothing else really matters”.
In 2016 and 2017, BI cut its benchmark rate by a total of 200 bps in a bid to boost sluggish lending and economic growth.
Warjiyo said the hikes should not immediately impact economic growth as the central bank would compensate with looser “macroprudential” rules.
These would be discussed at BI’s meeting in late June, though previously Warjiyo has said they could included easing housing mortgages rules.
By the end of 2018, BI expects lending growth to hit 12%, after languishing in the single-digits in the past few years. April’s annual growth rate was 8.9%.
With lending and consumption weak, Indonesia’s annual economic growth has been stuck at about 5%.
On Monday, Finance Minister Sri Mulyani Indrawati said the government was prepared to use short-term measures to support the economy even if that meant slightly lower growth.
The government has a 2018 growth target of 5.4%. BI said yesterday it still expected expansion of 5.2%, better than last year’s 5.07%.
Despite the hawkish tone in BI’s statement, economists are divided over the pace and extent of further tightening.
“We expect further hikes later this year, but we doubt that a repeat of the aggressive tightening cycle seen in 2013 is on the cards,” Capital Economics said in a note, citing Indonesia’s better fundamentals compared to when it was dubbed one of the “Fragile Five”.
In 2013, during the so-called “taper tantrum”, BI raised rates by 175 basis points.
The rupiah, one of the worst performers among Asian currencies this year, barely moved on the rate news and closed at 13,985 per dollar.
The currency has gained slightly since hitting the lowest in more than two years last week, partly due to foreign buying of bonds.
Ten-year government bond yields were quoted at 7.12% yesterday, down 50 basis points in a week.
Stressing Indonesia’s sound fundamentals, Warjiyo said the inflation rate was seen at 3.6% at the end of 2018, while the current account deficit was expected to be below 2.5% of GDP.
“Bank Indonesia is now doing more proactive and forward-looking policy, particularly with regard to a possible higher current account deficit, as well as inflationary pressure stemming from the current higher oil price environment,’’ Harry Su, managing director at financial research firm Samuel International, said.