JAKARTA (TheInsiderStories) – Indonesian central bank governor Agus Martowardojo said the low interest rates era will soon end due to global monetary tightening and economic recovery, including in the world’s biggest economy, the United States.
“We are dealing with high interest rate era, as he U.S Fed could [possibly] raise its benchmark rate more than three times this year,” Martowardojo told reporters on Thursday (3/5). He added higher US Fed Fund rate may have implication to rising yields of the U.S treasury bond.
Martowardojo said central bank in emerging markets may be forced to raise their benchmark interest rate to maintain attractiveness of portfolio investment at each countries.
The Federal Open Market Committee (FOMC) held the funds rate at a target of 1.5 percent to 1.75 percent, as expected. Markets have been watching the U.S central bank for clues as to how aggressive it will be this year.
The Fed is expected to raise the rate three times this year as initially planned, but analysts predict that a fourth increase looms as inflation is rising.
After the Fed’s decision, Indonesian rupiah is moving down until this afternoon, become one of the weakest currencies in Asia. The currency traded at Rp13,965 per US dollar in the spot market weakened 0.18 per cent from previous day’s trade session, make the currency became one of the weakest in the region.
Meanwhile, the Jakarta Composite Index (JCI) ended trading significantly lower on Thursday. It dropped 2.55 percent to close at 5,858.72 today.
Financial market observers said the sharp drop in the rupiah exchange rate and share prices was caused by a wave of foreign funds moving away from the country’s financial markets.
Many foreign investors shifted their investments overseas to take advantage of the soaring increase in the yields of United States treasury bills, which have been on an upward trend since the US Federal Reserve further upped its benchmark rate by another 25 basis points in March to a range of 1.50 to 1.75 percent.
After an aggressive bout of easing that delivered eight cuts over the past two years, Indonesia’s central bank has been on hold since October 2017, guarding against inflation and currency risks. While economic growth is still stuck at about 5 percent, rising food prices — in particular for rice — is starting to worry governments.
Indonesia’s central bank left its benchmark interest rate unchanged last month as policy makers guard against currency volatility following a rout in global markets that put the rupiah under renewed pressure.
With the low interest rate, Indonesia is no longer an attractive destination for global portfolio investment.
Bank Indonesia confirmed last week that it stepped in to stabilize the rupiah after the currency fell to its lowest since June 2016.
Despite the Fed’s impact, investor risk appetite also diminished ahead of the much awaited China-U.S. trade talks which are scheduled to begin later in the day. U.S. delegation led by Treasury Secretary Steven Mnuchin, will meet Chinese officials for talks on Thursday and Friday.
The most likely outcome is an agreement to keep talking, with U.S. President Donald Trump maintaining his threat to press ahead with punitive tariffs on Chinese goods, trade experts say.