Bank Indonesia has more work to do
JAKARTA: If the rupiah’s slide is any indication, Bank Indonesia will need to make good its pledge for stronger measures after its first interest rate increase since 2014 failed to contain a market sell-down.
The rupiah declined 0.8% to 14,158 against the dollar, its weakest since October 2015, as markets reopened last Friday after the central bank policy decision. The benchmark 10-year bond recorded its fifth weekly loss, with analysts saying the central bank would probably need to raise rates again.
“This interest rate increase is probably enough to slow the outflow but it’s certainly not enough to reverse the selling pressure,” said John Teja of PT Ciptadana Sekuritas. “The central bank and the government really have to restore confidence in the rupiah and the economy.”
Global funds have dumped a net $2.3 billion in Indonesian sovereign bonds since the end of March and pulled $1.2 billion from shares. Outgoing governor Agus Martowardojo said the central bank “won’t hesitate” to lift rates again if needed to ensure stability.
The rupiah is still being sold because investors had already priced in the rate increase, he said, while higher US yields continue to add pressure.
Should Bank Indonesia carry through with its promise, the bond markets may then stabilise, said Vivek Rajpal of Nomura Holdings. “That said, not all is clear on the external front. The US longer end is still rising and making newer highs, which is weighing on markets.”
The Federal Reserve is poised to add to its six rate increases since December 2015 as soon as next month, and concerns of a faster tightening pace have propelled the 10-year treasury yield to more than 3%.
The rupiah has declined 4% this year even as the central bank spent more than $7 billion from its reserves since the start of February to halt the slump. The benchmark bond yield is trading near its highest in 14 months, while the stock index has dropped 9% in 2018.
Bank Indonesia’s hike “reflects the need for the central bank to strike a balance between the reality in the financial markets and the needs from businesses and consumers”, said Agus Yanuar, chief investment officer at PT Samuel Aset Manajemen. “We are expecting more interest rate increases this year, at least by another 25 basis points.”
Bank Indonesia is caught between the need to ensure that growth doesn’t stutter after first-quarter GDP fell short, while limiting the impact of further capital outflows. Its peers in the Philippines and India face similar challenges.
Foreigners own 38% of the sovereign bonds in Indonesia, among the highest in Asian emerging markets, making it susceptible to outflows. To preserve yield appeal, the central bank may have to tighten again in two to three months, said Jeffrosenberg Tan, head of strategy at PT Sinarmas Sekuritas.