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Bank Indonesia further raises rate as 'fragile' rupiah at risk
Publication Date : 13-09-2013
Bank Indonesia (BI) announced another key interest rate increase on Thursday as the central bank sought to shield the rupiah from the threat of more capital outflows ahead of the possible tapering of the US monetary stimulus next week.
BI’s five-man board of governors hiked the BI rate by 25 basis points to 7.25 per cent, just two weeks after the central bank raised the rate by 50 basis points on August 29.
The central bank also added a quarter percentage point increase to both the overnight deposit facility rate (Fasbi) and the lending facility rate, which now stand at 5.5 per cent and 7.25 per cent, respectively.
The move reaffirmed the hawkish stance of Governor Agus Martowardojo, who has jacked up the BI rate a cumulative 150 basis points since taking office in May, the most aggressive monetary tightening in nearly a decade.
BI has acknowledged that the interest rate hikes would affect Indonesia’s economic growth as high lending costs were expected to slow new investment. The central bank recently revised down its growth projection this year to 5.5–5.9 per cent from 5.8–6.2 per cent. For next year, the central bank lowered its target to 5.8– 6.2 per cent from 6.0–6.4 per cent.
The central bank said it was now focusing on controlling inflation, stabilising the rupiah exchange rate and ensuring that the current account deficit was managed to a sustainable level.
Analysts have said that the latest round of interest rate hikes was aimed mainly to shield the rupiah, which might face intense pressure due to capital outflow, as emerging market economies brace for nervy times in the upcoming days.
On September 17-18, top officials from the US Federal Reserve will decide the fate of its monetary stimulus in an announcement that could largely affect global liquidity and influence sentiment among portfolio investors.
“BI sensibly chose not to take risks considering the jumpy markets right now,” Robert Prior-Wandesforde, an economist with Credit Suisse, said on Thursday.
The latest interest rate hike was “rather unnecessary” and it showed that the central bank was focusing more on rupiah volatility rather than inflation, according to economists from Bank Danamon.
“[BI] prefers giving a strong signal to the market, which we think should have a positive impact on the rupiah,” they wrote in a note.
The rate hike was responded to positively by the bonds and stocks markets. The Jakarta Composite Index (JCI) rose 0.2 per cent to close at 4,356.61, while the yield for the benchmark 10-year government bonds fell two basis points to 8.67 per cent, the lowest level since September 3.
The rupiah closed at 11,350 per dollar on Thursday, after losing 1.5 per cent before the announcement, according to Bloomberg.
The rupiah has plunged 15 per cent this year, overtaking the Indian rupee as the region’s worst-performing currency, as Indonesia’s huge trade deficit which widened to a historic level of $2.3 billion in July raised concerns over the supply-demand gap of dollars in the local market.
The rupiah was included by US-based Morgan Stanley in its list of the “fragile five” currencies most vulnerable to capital outflows, alongside the South African rand, Indian rupee, Brazilian real and Turkish lira.