The central bank of Indonesia raised its benchmark interest rate (the seven-day reverse repo rate) by 25 basis points (bps) to 5.50 percent at the August 2018 policy meeting. The decision was in line with our expectations as heavy pressures have been affecting the rupiah after the collapse of the Turkish lira.
Earlier on Wednesday (15/08) the Indonesian rupiah nearly touched the IDR 14,650 per US dollar level. Emerging market currencies, including the Indonesian rupiah, have become under heavy pressures after the Turkish lira collapsed amid worries over President Tayyip Erdogan's influence over the country (including the economy), his repeated calls for lower interest rates and worsening ties with the USA.
Meanwhile, another looming Fed Funds Rate hike in September as well as uncertainty over the global trade war are also keeping investors in search of safe haven assets such as the US dollar or Japanese yen.
Bank Indonesia also uses the higher interest rate environment to improve the country's current account deficit (CAD). The CAD was recorded at USD $8.0 billion, or 3.0 percent of Indonesia's gross domestic product (GDP), in the second quarter of 2018.
Bank Indonesia is among the most aggressive central banks in Asia in terms of tightening its monetary policy so far in 2018. Bank Indonesia Governor Perry Warjiyo also reiterated the central bank's pledge to remain pro-active and ahead of the curve. Over the past three months, the central bank of Indonesia raised its key rate from 4.25 percent to 5.50 percent.
As we noted in our latest research report, we expect Bank Indonesia to hike its benchmark rate at least once more (after the August rate hike) before the end of 2018. Currently, we maintain our forecast of seeing Indonesia's benchmark interest rate at 5.75 percent at the year-end (with the remaining 25 bps hike expected to be imposed in September 2018). To stay updated about our projections, our research reports can be ordered by clicking on the link above or below.
After the rate hike announcement on Wednesday afternoon (15/08) the Indonesian rupiah erased earlier losses, while bonds rallied, with the 10-year government yield dropping to 8 percent from 8.03 percent earlier). However, we still expect the rupiah to depreciate gradually in the days ahead as global uncertainties persist while Indonesia also recorded another big USD $2.03 billion trade deficit in July 2018 (putting pressure on the Q3-2018 current account deficit).
Bank Indonesia's benchmark rupiah rate (Jakarta Interbank Spot Dollar Rate, abbreviated JISDOR) was almost unchanged at IDR 14,621 per US dollar on Wednesday (15/08).
Indonesian Rupiah versus US Dollar (JISDOR):| Source: Bank Indonesia