BI Raise Benchmark Rate to Stabilize Rupiah

BI's Governor Perry Warjiyo - Photo by Bank Indonesia.

JAKARTA (TheInsiderStories)—Bank Indonesia raise key interest rate by 25 basis points (bps) to 4.75 per cent to stabilize rupiah, said Bank Indonesia governor Perry Warjiyo on Wednesday (25/05).

The Indonesian Central Bank also raised deposit facility rate by 25 basis points to 4.00 per cent, and lending facility rate by 25 basis points to 5.50 per cent.

Perry said the rate hike as a pre-emptive move to anticipate the Federal Reserve meeting/The Fed on June 13 that likely to raise the benchmark rate by 25 basis points to 1.75 per cent to 2 per cent.

“BI will continue to calibrate the condition of both domestic and global financial economies to take advantage of space for measured interest rates hike,” he added.

The interest rate hike was the second in this month. In the policy 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.

Coordinating Minister for Economic Affairs Darmin Nasution hoped additional Board of Governors meeting today can provide deeper gains in rupiah against US Dollar.

Darmin said previous interest rate hike did not get a good response from the market caused by the mismatch of market expectation over the governors meeting result.

“People had predicted larger amount [of interest rate hike], or faster timing,” he said on Wednesday (30/05).

It remains unclear whether this hike will be strong enough to raise the rupiah and strengthen the Jakarta Composite Index (JCI) as the rupiah and JCI still overshadowed by the external conditions of the global economy, primarily the likelihood of the political crisis in Italy.

Italy is facing a snap election after President Sergio Mattarella vetoed anti-establishment Five Star and League political parties’ Minister of Economy choice of Paolo Savona. Mattarella appointed the former International Monetary Fund (IMF) official Carlo Cottarelli as interim prime minister instead with the task to form a government.

Mattarella refused Savona’s nomination for threatening to bring Italy out of the European Union. As a result, the government becomes unformed.

This condition made the Mattarella will almost certainly lose a parliamentary vote of confidence. It then leads to the new election within 60 days to 70 days.

The political turmoil in Italy, the third largest economy in the Euro single currency, could bring negative effect to the European and global economy. Many economists predict the effect would be much worse than Greece who its debt crisis shook global market nearly a decade ago. Italy’s economy is 10 times larger than Greece and has debt above €2 trillion, equivalent to more than 130 per cent of annual economic output. Italy’s debt was the highest in the world after Japan and Greece.

Both rupiah and JCI shows a weakening trend in today’s trading. Rupiah weakened 0.04 per cent or 6 basis points to Rp13,989 per Dollar AS at 2.43 p.m., while The JCI dropped 0.05% or 3.30 points to 6,065.02 at the end of the first trading session.