Bank Indonesia to Raise Its Benchmark Interest Rate in 2018?
Indonesia Investments expects to see Bank Indonesia raising its benchmark interest rate at least once in 2018 in order to relieve pressures on the Indonesian rupiah. Rising expectations that the US Federal Reserve will implement four interest rate hikes in 2018, while the 10-year US treasury yield passed beyond the 3 percent line, have resulted in major pressures on emerging market assets, including Indonesia's rupiah and stocks.
Bank Indonesia's benchmark 7-day repo rate is currently at 4.25 percent (where it has been since September 2017), a relatively low rate for Indonesian standards which was made possible by the country's low inflation, the under-control current account deficit, and a stable rupiah exchange rate. Moreover, the central bank seemed willing to support the government's push for accelerating economic growth.
Now, however, the rupiah cannot be labeled stable anymore and has been in need of central bank intervention (a bond-buying program and the "burning" of foreign exchange reserves) to stay below the IDR 14,000 per US dollar level. In 2018 the rupiah depreciated 4.82 percent between the currency's strongest level of IDR 13,290 per US dollar on 25 January 2018 and its weakest position (so far) of IDR 13,930 on 26 April 2018.
Last week Bank Indonesia issued a statement in which it said the benchmark interest rate could be raised in case pressure on the rupiah persists. If external pressures indeed continue then a 0.25 percent hike at the May 2018 monthly policy meeting would be a possibility. The downside of a rate hike would be that credit growth - needed to boost macroeconomic growth higher - may require more time to rebound. However, considering aggressive monetary easing conducted by Bank Indonesia (especially through multiple rate cuts) in recent years has not managed to boost credit growth in Indonesia, it can be concluded that the traditional close link between interest rates and credit growth (or decline) is currently not that strong in Indonesia. Hence, a small rate hike would possibly not lead to a significant impact on credit growth.
So far, Bank Indonesia has been buying bonds and selling foreign currency to defend the rupiah in recent volatile times. Indonesia's foreign exchange reserves fell to USD $126.0 billion at the end of March 2018, down from a level of USD $128.06 billion one month earlier, and down from an all-time record high of USD $131.98 billion at the end of January 2018.
Indonesian Rupiah versus US Dollar (JISDOR):
| Source: Bank IndonesiaBahas
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