Bank Indonesia (BI) senior deputy governor Destry Damayanti rated, the student rallies that took place since Sept. 23, was one of the causes of the weakening of Rupiah - Photo by ING

JAKARTA (TheInsiderStories) – The recent round of tariff slinging between the United States (US) and China has sparked emerging market (EM) foreign exchange weakness again, which should keep Bank Indonesia 7 Days Reverse Repo (BI 7-DRR) rate on hold for now, said ING in the latest report.

Nicholas Mappa, ING Senior Economist said, the Indonesia Rupiah had been performing relatively well in the first four months of the year as a now dovish US Federal Reserves (Fed) signaled a possible window for emerging market’ central banks to pause and maybe even reverse their aggressive tightening of 2018.

Positive expectations for US – China trade negotiations bolstered the case for this but the month of May has added a wrinkle to that narrative: its tariff slinging time again, he added.

The recent escalation of trade tensions has sparked a heavy risk-off tone and EM currencies have been on the run since. For the month, the local currency has pulled back by 1.39 percent with the Rupiah under additional pressure as Indonesia recorded a wider-than-expected trade deficit for the month of April.

With these developments, market players are expecting BI 7-DRR to remain on hold as Governor Perry Warjiyo deploys measures to stabilize the currency.

Last month Board governor of BI decided to maintain a BI- 7DRR at 6 percent, a Deposit Facility interest rate of 5.25 percent, and a Lending Facility interest rate of 6.75 percent.

Previously, Warjiyo stressed that it could reduce the benchmark rate with a note that macroeconomic and financial stability is maintained. He revealed, the Bank had raised its benchmark interest seven times in recent months, so that the current benchmark interest rate had reached its peak.

Macroeconomic and financial stability, according to him, can be done through increasing the portion of government bonds for foreigners so that there is a flow of funds into the country. This is done by cooperation with ministry of finance.

This year, Warjiyo said BI has asked Finance Minister Sri Mulyani Indrawati to issue more retail bonds in order to reduce the long-term fiscal burden in the era of high interest rates due to the nature of long-term government bonds while retail bonds were more short-term.

While, Vice President Jusuf Kalla urged that bank’ interest rates not to be too high and could match loan interest rates in Thailand and Malaysia. In addition to the high loan interest rates, Kalla also highlighted the yield of state bonds not to be too high.

“All ask for 8 percent of the yield. How can the capital market grow, if interest is high,” he added.

Warjiyo said the decision is consistent with efforts to strengthen external stability, particularly to control the current account deficit  within a safe limit and maintain the attractiveness of domestic financial assets. The central bank also continues to pursue a monetary operations strategy to increase the availability of liquidity in driving bank financing.

He revealed, the decision was made in regarding to global and domestic conditions. He considered, world economic tends to be slowed, caused by reduced uncertainty in the global financial market. As an example, said Warjiyo, US economic growth slowed due to the limited fiscal stimulus, structural problems of the workforce, and the decline in business confidence.

In line with the slowing outlook for world economic growth, global commodity prices are predicted to decline, including world oil prices, as well as the normalization of monetary policy in developed countries which tends to not be as stringent as the original estimates and uncertainty in the global financial market is diminishing.

The increase in the Fed Fund Rate is expected to be lower and the reduction in the central bank balance sheet becomes smaller than planned. Global economic and financial developments on the one hand provide challenges in encouraging exports, but on the other hand increase the inflow of foreign capital to developing countries, including Indonesia.

“Going forward, Bank Indonesia will take an accommodative macro-prudential policy and strengthen payment system policies in order to expand economic financing,” he said.

Going forward, BI convinced will continue to consistently maintain price stability and strengthen policy coordination with the government, both at the central and regional levels, to keep inflation low and stable in the target range of 3.5±1 percent, Warjiyo said.

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