Both the Jakarta Composite Index (Indonesia's benchmark stock index) and the Indonesia rupiah exchange rate are under pressure this morning as market participants are waiting for results of the central bank's Board of Governor's meeting that is held today (12/12) in Jakarta. Speculation has emerged that Indonesia's central bank (Bank Indonesia) will raise its benchmark interest rate (BI rate) one more time in 2013 in order to combat the country's current account deficit as well as mitigate the impact of a possible winding down of QE3.
The Federal Reserve's monthly USD $85 billion bond buying program (quantitative easing or QE3) is expected to be wound down, perhaps even this month, as economic data from the United States indicates an improving economy. This will cause capital outflows from emerging markets, including Indonesia, as a significant portion of cheap US dollars were invested in lucrative emerging markets in recent years through QE3. The Federal Reserve's FOMC meeting is scheduled for 17-18 December 2013 and is expected to shed more light on the future of the QE3 program.
If the BI rate will be raised again today, then it is expected to impact negatively on the IHSG's performance. Around 11 o'clock in the morning (Jakarta time), the IHSG was down 1.06 percent as investors are concerned about the results of the Bank Indonesia meeting. This year the central bank already raised its BI rate gradually by 1.75 percentage points from 5.75 percent in June to 7.50 percent in November 2013, particularly to combat high inflation (which occurred after the government raised prices of subsidized fuels in June 2013).
The Indonesia rupiah exchange rate fell past the psychological IDR 12,000 mark this morning as the US dollar is appreciating to all emerging market currencies due to the looming end of the QE3 program.
• Indonesia Has to Focus to Offset Impact of Quantitative Easing Tapering (20/09)
• Indonesia Inflation Update: Consumer Price Index Moving Sideway
• Rupiah Exchange Rate
• Analysis of the Indonesian Rupiah Exchange Rate in November 2013