As we had predicted this morning, Bank Indonesia decided to raise its benchmark interest rate by 50 basis points (bps) to 5.25 percent at the two-day June policy meeting that was concluded earlier today. Presumably markets had been expecting a 25 bps rate hike (therefore being priced in already) and therefore the central bank of Indonesia possibly felt it had to take a more aggressive approach to defend the Indonesian rupiah that had weakened beyond the IDR 14,400 per US dollar level.
It was the third time in six weeks that Bank Indonesia raised its benchmark seven-day reverse repo rate. In mid-May 2018 the rate was still at 4.25 percent. Three hikes later the rate is currently at 5.25 percent, up a full percentage point. Two of the hikes came under recently inaugurated Bank Indonesia Governor Perry Warjiyo, who has repeatedly emphasized that he wants Bank Indonesia policies to be ahead of the curve and therefore seems in a much more aggressive mood than his predecessor.
The central bank's deposit and lending facility rates were also raised by 50 bps, to 4.50 percent and 6.00 percent, respectively, on Friday (29/06).
Key matters that are putting significant pressure on the rupiah - particularly after trading resumed after the long Eid al-Fitr when Indonesian assets had a lot of catching up to do - are:
- the Federal Reserve's June rate hike and its signals that it will raise its key rate twice more before the end of the year
- rising concern over trade tensions, led by the USA and China, and its impact on a looming global trade war as well as its impact on global economic growth
- Chinese authorities are deliberately weakening the Chinese yuan to make its exports more competitive. As a consequence, other emerging market currencies slide accordingly
- international crude oil prices are touching 3.5 year high levels. Considering Indonesia is a net oil importer, it puts pressure on the rupiah and the government's budget deficit (due to energy subsidies)
- Indonesia saw big monthly trade deficits in April and May. This is adding more pressures on the country's current account deficit (which is expected to widen in 2018)
- although still at a comfortable level, Indonesia's foreign exchange reserves have declined significantly over the past couple of months as the central bank sold forex to defend the rupiah
Bank Indonesia's benchmark rupiah rate (Jakarta Interbank Spot Dollar Rate, abbreviated JISDOR) depreciated 0.93 percent to IDR 14,404 per US dollar on Friday (29/06). On Monday we expect to see a decent rebound. So far this year the JISDOR has weakened 6.32 percent, thus being the worst performer in Asia after the Indian rupee and Filipino peso. Other rupiah indices show a strong rebound after the latest Bank Indonesia announcement.
Indonesian Rupiah versus US Dollar (JISDOR):| Source: Bank Indonesia
The benchmark Jakarta Composite Index, which was already up around 1 percent prior to the rate decision, soared after the announcement finishing the day at +2.33 percent to 5,799.24 points on the back of the perspective of a stronger rupiah.
Relaxing the Loan-to-Value Ratio
Meanwhile, Bank Indonesia also announced that it is to implement accomodative macroprudential policy by relaxing the loan-to-value (LTV) ratio in order to boost credit growth (somewhat offsetting the negative impact of the higher benchmark rate), hence maintain the domestic economic recovery momentum. The policy, effective per 1 August 2018, is applicable to the property sector as follows:
(i) relaxing the LTV ratio for property loans and FTV ratio for property financing;
(ii) relaxing the number of credit or financing facilities available through the pre-order mechanism; and
(iii) amending the stages and limits applicable to liquidate loans/financing.
The above-mentioned policy mix is expected to stimulate Indonesia's property sector, which is still regarded to have potential to accelerate and cause the multiplier effect on the national economy. Furthermore, the macroprudential policy also reinforces previous macroprudential policies concerning the Macroprudential Intermediation Ratio (MIR) and Macroprudential Liquidity Buffer (MLB), which aim to catalyze the bank intermediation function and strengthen bank liquidity management. The policy move is also synergized with implementation of the average rupiah reserve requirement as part of Bank Indonesia's efforts to reformulate the monetary policy operational framework, thereby increasing liquidity management flexibility in the banking industry and nurturing the bank intermediation function, while supporting financial market deepening. The three policies will become effective on 16th July 2018 for conventional banks and 1st October 2018 for sharia banks.
Credit Interest Rates of Indonesian Commercial Banks by Type:
(in IDR trillion)
Source: Otoritas Jasa Keuangan (OJK)