In line with expectations the central bank of Indonesia (Bank Indonesia) raised its benchmark interest rate - the BI seven-day reverse repo rate - by 25 basis points to 4.75 percent in an unscheduled meeting on Wednesday (30/05). In combination with the scheduled monthly policy meeting on 16-17 May 2018, Bank Indonesia raised the benchmark interest rate by a total of 0.50 percent this month.
This decision came only a few days after the inauguration of new Bank Indonesia Governor Perry Warjiyo. And it shows that the new governor does not want to wait before a Federal Reserve decision at the June FOMC meeting (12-13 June 2018) before adjusting Bank Indonesia's monetary policy. It is widely expected that the Fed will raise its benchmark interest rate again at this policy meeting. Such expectations lead to capital outflows from emerging market economies, including Indonesia. The latest Bank Indonesia decision to raise its benchmark before the Fed releases any official decision shows that Warjiyo wants to be ahead of the curve.
After Bank Indonesia announced the unscheduled policy meeting on Monday (28/05) - during office hours and not as usual after markets closed - the rupiah and Indonesia's benchmark Jakarta Composite Index immediately strengthened significantly as the market seemed confident that the meeting would imply a rate hike.
Meanwhile, the deposit facility and lending facility were also raised by 25 bps to 4.00 percent and 5.50 percent, respectively (effective per 31 May 2018).
In a statement that was released on the official website of Bank Indonesia it was written that rupiah stability was the key reason for the latest interest rate hike. Besides the rate hike, Bank Indonesia also emphasized that it will continue to optimize its dual intervention policy in the foreign exchange and bonds markets to safeguard plenty of liquidity amid the high degree of volatility at the moment.