Initially, Indonesia Investments expected one or two interest rate hikes before the end of 2021 as the COVID-19 situation brought plenty of uncertainties to Indonesia, while there were also signs that the Federal Reserve would cut its stimulus program more quickly than planned (followed by rate hikes in the world’s top economy).

However, fortunately, there occurred the ‘Indonesia miracle’. While countries with high vaccination rates continue to struggle with new COVID-19 cases, the pandemic left Indonesia around October 2021 (despite the very low vaccination rate), leading to speculation that immunity through natural infection is far more superior.

Meanwhile, the Federal Reserve (Fed) also offered less uncertainty in December by saying that rising inflation forces it to end the ultra-easy policy that was put in place at the start of the COVID-19 crisis. The Fed said it will accelerate the reduction of its monthly bond purchases: starting from January 2022, it will buy USD $60 billion of bonds, each month (which is half the level prior to the November 2021 taper) and USD $30 billion less than it had been buying in December 2021. So, it seems that in late winter the Fed’s quantitative easing program will end, implying we may see the start of Fed rate hikes in the early spring of 2022. Fed officials seemingly expect to see three rate hikes in 2022, with two in the following year, and two more in 2024.

So, if indeed the Fed follows this schedule and Bank Indonesia only responds by Q3-2022, it would be a marked difference from the previous tapering cycles when Bank Indonesia had to respond swiftly in order to limit major capital outflows that put big pressure on Indonesia’s rupiah exchange rate.

But today’s circumstances are different. One important difference is that Indonesia may actually post a current account surplus in full-year 2021 thanks to very strong exports (on the back of high commodity prices). The current account balance is one of the macroeconomic indicators that is closely followed by portfolio investors. The huge current account deficit posted by Indonesia over the past decade was a reason for investors to rapidly ditch Indonesian assets in times of global economic shocks. So, hearing Warjiyo’s statements about not immediately following the Fed’s example in terms of rate hikes shows how much confidence Indonesia’s central bankers have gained now the current account is (relatively) under control.


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