BI's Governor Perry Warjiyo - Photo by The Insider Stories

JAKARTA (TheInsiderStories)Bank Indonesia raise its key interest rate by 50 basis points (bps) to 5.25 per cent to stabilize rupiah, said Bank Indonesia governor Perry Warjiyo on Friday (29/06).

The Indonesian Central Bank also raised its deposit facility rate by 50 basis points to 4.5 per cent, and its lending facility rate by 50 basis points to 5.75 per cent.

This interest rate hike was the third in this year. In the governors meeting on 17 May 2018, Bank Indonesia raise its key interest rate by 25 basis point (bps) to 4.50 per cent for the first time since 2014 to support the rupiah and stabilize domestic markets. The Indonesian Central Bank also raised its deposit facility rate by 25 basis points to 3.75 percent, and its lending facility rate by 25 basis points to 5.25 percent.

Bank Indonesia also rose its key interest rate by 25 basis points (bps) to 4.75 per cent to stabilize rupiah on May 30, 2018. The Indonesian Central Bank also raised its deposit facility rate by 25 basis points to 4 per cent, and its lending facility rate by 25 basis points to 5.5 per cent.

“This decision was taken as an effort to stabilize the rupiah exchange rate amid the magnitude of global pressure, especially from the United States,” Warjiyo said.

In the global factor, U.S’s Federal Reserves (Fed) is likely to raise its benchmark rates for twice or more in this year. The US central bank seems also will increase the interest rate two or three times next year.

In addition, there is also pressure from the European Central Bank (ECB) that will reduce bond purchases in September and stop buying in December 2018. Furthermore, China’s central bank also lowered the limit of statutory reserves (GWM) that makes the Chinese renminbi weakened.

The trade war between US and China also put more risk and uncertainties in the global financial market.

In the internal factor, the rupiah weakening also affected by Indonesia’s persistent current account deficit, which this year is exacerbated by a trade deficit. Indonesia recorded current account deficit of US$5.5 billion, or 2.15 per cent of GDP, in the first three months this year.

Indonesia recorded US$1.52 billion in the trade deficit in May 2018. The trade deficit in May was lower than April 2018 reached US$ 1.63 billion, but higher than May 2017 which surplus US$ 470 million. Meanwhile, in the current year, the trade balance of January-May 2018 deficit of US $ 2.83 billion.

The high trade deficit triggered by the significant increase in import by 28.12 per cent to US$17.64 billion in May 2018 (year on year/yoy). Meanwhile, the export only grew 12.47 per cent to US$16.12 billion. As a result, the oil and gas trade recorded deficit of US$1.24 billion and non-oil and gas posted a deficit of US$0.28 billion.

The rupiah exchange rate against the US dollar (US) immediately rose sharply after Bank Indonesia raised the interest rate. Rupiah strengthened 0.51 per cent to Rp14,310 per US$1 in the spot market at 15.00 p.m. today (29/06).

Email: fauzulmuna@theinsiderstories.com

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