JAKARTA (TheInsiderStories) – Bank Indonesia (BI) followed through on its pledge for pre-emptive steps by carrying out a 25 basis point rate hike. The bank’s decisive stance has calmed markets as it promised to remain hawkish into 2019
Governor Warjiyo Looks to Remain Ahead of the Curve
Following through on his 5 September pledge to take “pre-emptive” steps to stay ahead of the curve as Indonesia faces new developments, the central bank of Indonesia nudged its 7-day reverse repurchase rate by 25 basis points higher to 5.75 percent. BI has increased its policy rate a total of 150 basis points for the year with Governor Warjiyo looking to stabilise the Indonesian Rupiah and keep local bond yields attractive to draw in foreign funds.
In addition to rate hikes, Indonesia looks to roll out non-monetary measures to curb IDR weakness, expanding its policy toolkit to include measures such as limiting luxury goods imports, hedging instruments for corporates, and enticing exporters to convert half of their earnings to IDR.
Rupiah Stabilises After Decisive BI
The Indonesian Rupiah has depreciated by roughly 9.9 percent year-to-date as Indonesia’s current account deficit to GDP deteriorated to -2.36 percent in the second half of 2018 from -1.71 percent at the end of 2017. In the wake of the emerging market contagion at the start of September, the Rupiah slumped to 14,935, the weakest level since the Asian financial crisis, prompting Warjiyo to signal immediate countermeasures to stem the tide. Since then, the Rupiah has stabilised with the government deploying further measures to stem the foreign currency outflows.
Hawkish Now, Hawkish Again Tomorrow
With BI officials telegraphing that monetary authorities will maintain their current stance until next year, we can expect BI to remain busy deploying a host of measures to address Rupiah volatility. Central bank rate hikes moving in tandem with its planned hedging programmes and tax incentives for exporters will likely contribute to Rupiah stability in the near term, especially as Governor Warjiyo appears to enjoy a degree of credibility from the market.
Written by Nicholas Mapa, ING Senior Economist, Philippines