JAKARTA (TheInsiderStories) - In a period of financial volatility, policy consistency and predictable could be a potent panacea. Consistency and predictable are certainly the central theme of Bank Indonesia’s decision to raise the reference seven-day reverse repurchase rate by 25 bps to 5.75 percent on Thursday, which makes it the fifth hike for 2018.
“The decision is consistent with ongoing efforts to lower the current account deficit within a manageable threshold while maintaining the attractiveness of the domestic financial markets, thus further strengthens Indonesia’s external resilience despite widespread global uncertainty,” BI said in its policy statement.
Subsequently, BI also raised the Deposit Facility and Lending Facility by 25 bps to 5 per cent and 6.50 per cent, respectively.
The decision was taken after the Federal Reserve concluded its FOMC meeting and raised the reference Fed Fund Rata by 25 bps to 2 per cent to 2.25 per cent. In addition, the world’s most influential central bank also maintained forecast for one more hike later this year and three in 2019.
The Fed also dropped the word ‘accommodative’ in its policy statement, which market initially interpreted as a hawkish signal.
However, Fed Chair Jerome Powell, speaking in a press conference, said the decision to drop the word ‘accommodative’ does not represent any change in rate hike path and saw no upside risk to US inflation, which is targeted at 2 per cent.
US inflation rate is a key indicator on wheter the Fed will take its monetary tightening cycle toward an accelerating course.
BI’s decision was responded positively by the market. The Jakarta Composite Index ended up 1.0 per cent at 5,929 and the rupiah strengthened to 14,919 per US$1 from 14,938 per US$1.
Dutch-based ING said BI’s policy approach and series of other measures to curb volatility had earned Governor Perry Warjiyo ‘a degree of credibility’ from the market.
One such measure is the introduction of domestic non-deliverable forward market introduced today. The introduction is expected to attract foreign investors who currently hedge their rupiah exposure via offshore non-deliverable market, which plays a significant contribution in rupiah’s volatility.
Warjiyo said BI’s policy stance remains ‘hawkish’ and leans toward ‘pre-emptive’ approach which will be data-dependent based on the Fed’s policy normalization and the global economy. He added that BI will continue with its effort to stabilize the rupiah while maintaining market mechanisms.
Furthermore, Warjiyo said BI has yet to see the pass-through effect of currency depreciation to inflation, which is estimated at the lower-end of the central bank’s 2.5 per cent to 4.5 per cent target this year.
BI also expects policy normalization that will be taken by other key central banks like Bank of Japan and European Central Bank will counter the might of the dollar and ease pressure on the rupiah, according to Warjiyo.
Written by TIS Intelligence Team
