JAKARTA (TheInsiderStories) - The Federal Open Market Committee (FOMC) is scheduled to meet on September 16 and 17 and could raise short-term interest rates for the first time in more than nine years. The Federal Reserves (The Fed) rate is hanging on 0.25 percent since 2008.
Many experts say if a rate hike doesn’t come this month, it could well be coming at a meeting that follows, in October or December.
Bank Indonesia Govenror Agus Martowardojo expects The Fed to give a certainty on its rate policy to help the global economy find the new balance. He said the central bank has prepared several policies in the event that The Fed raises its rate.
“Indonesia and other emerging countries are preparing ourselves to face this situation. We have adopted several policies such as prudent monetary policy, conducting liquidity management more effective, keeping supply and demand in foreign exchange market, assuring that inflation is consistent with the target, managing foreign exchange reserves and maintaining the current account to be healthier,” Agus said on the sidelines of hearing with parliament members on Tuesday night.
Indonesia’s Finance Minister Bambang Brodjonegoro predicted that the ongoing global economic fluctuations will continue until the US Fed makes a decision. Based on the current situation, he said, the government is planning to revise the basic macro economic assumptions for 2016’s State Budget after the FOMC meeting.
Capital market analysts shared the government views that one of the reasons for Indonesia’s economic uncertainty has been the US Federal Reserve (Fed) delayed decision to adjust its benchmark interest rates.
They said Federal Reserve Board Chair Janet Yellen must review whether conditions have been met for “liftoff,” or the 1st interest rate increase in 9 years. Most economists would have said Yellen was ready for takeoff. But financial market turbulence, led by downdrafts coming from China, may keep rates on the ground at this week’s meeting of the FOMC.
Economists said, some of the key factors being watched by The Fed to raise the rate are financial conditions, inflation, economic growth and employment. UBS economist Drew Matus said the current level of financial conditions seems to be inconsistent with a rate hike. He noted the conditions were more positive earlier during the rate-raising cycles dating back to 1994, 1999 and 2004.
In the second-quarter of 2015, U.S gross domestic product was revised higher, to a better-than-expected 3.7% annual growth rate. While, inflation rates are still in lower level 2 percent and the job market down to 5.1% in August.
Payroll gains have been steady this year, averaging more than 200,000 jobs added per month. The Fed has been disappointed with the levels of wage growth and labor market participation.
Impact on Rupiah
Agus Martowardoyo said the global uncertainty may still be high in 2016. Given this situation, the central bank proposed the average level of Rupiah in 2016 Revised State Budget at a range of Rp 13,400 to Rp 13,900 per U.S dollar. This year BI estimated the average level of Rupiah will end in the range of Rp 13,100 to rp 13,400.
In the period of January to September 14, the Rupiah has dropped 15.78 percent against the US dollar and was traded at Rp 14,408 against the dollar on Tuesday. The average level of Rupiah was at Rp13,183 in nine month of the year.
President Joko Widodo says that people should not be too concerned about the weakening of the Rupiah as it is still manageable and the government, together with the central bank, will be able to keep the economy stable. The depreciation of the Rupiah, he said, had been largely caused by external factors, such as the strengthening of the US economy and the slowing of China’s economic growth.
The President also asserted that the fall of the rupiah was caused by a significant volume of imports, of things like consumer goods and electronics, adding that many Indonesians were import lovers.
“If we could reduce imports then the rupiah wouldn’t be as weak as it is today,” President Jokowi said in a press release.
He added that people should not be panic because Indonesia’s macro-economy and the State Budget’s fiscal room-to-move have started to improve. (*)
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