Bank Indonesia Governor Agus D.W Martowardojo

JAKARTA (TheInsiderStories) – Bank Indonesia (BI) raised 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, BI Governor Agus Martowardojo said in a press conference on Thursday (17/5).

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.

Martowardojo, whose term as governor will end later this month, also hinted that BI will raise the benchmark if the rupiah’s depreciation threatened BI’s 2018 inflation target of 2.5-4.5 per cent.

Indonesia and other emerging markets have been hit this year as U.S bond yields rose and the dollar rallied, deepening concerns about capital outflows.

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.

“In the future, BI put high concern on global financial market risks by doing the stabilization according to its fundamentals,” said Martowardojo.

The bank had embarked on a series of rate cuts from 2015 through 2017, as President Joko Widodo aimed to facilitate lending and boost growth. But despite the accommodative policy, the economy has been slow to surpass the year-on-year average growth of 5.1 per cent over the past five years.

The largest economy in Southeast Asia expanded by 5.06 per cent year-on year in the first quarter of 2018, following a 5.01 per cent growth a year ago.

The fall in the rupiah and composite index recently raised concerns over Indonesia’s ability to cope with the risks resulting from the growing uncertainties in the global economy.

The Indonesian rupiah weakened 0.43 percent to Rp14,097 per U.S dollar (Bloomberg Dollar Index) on May 16, a 31-month low. Meanwhile, the yield on Indonesia’s benchmark 10-year government bonds rose 12 bps to 7.217 percent. Net outflows from Indonesia’s rupiah-denominated bonds have totaled $2.3 billion since the end of March.

Bank Indonesia used its foreign currency reserves to prop up the rupiah, but with reserves diminishing 5.3 per cent from a record high of $132 billion in January to $124.9 billion in April, the bank had to resort to raising the interest rate.

The surprise deficit in April trade balance also put more pressure on the country’s current account, which was already in a deficit of $5.5 billion, or 2.15 percent of GDP, in the first three months this year. Indonesia posted a surprise US$1.63 billion trade deficit in April 2018, the largest since $1.96 billion in April 2014. The central bank projected the Current Account Deficit (CAD) 2-2.5 per cent from GDP.