The Federal Reserve indicated that an interest rate hike is unlikely to occur at the next FOMC meeting in April 2015. Analysts now assume that the Fed will raise its interest rate environment in the (late) summer of this year once there has been further improvement in the US labour market while inflation has moved back to the Fed’s two percent objective over the medium term.

After the Federal Reserve’s announcement, US markets (stocks and bond prices) immediately rose sharply on Wednesday. The Dow Jones industrial average climbed 1.3 percent to 18,076.19 points, the Standard & Poor's 500 index rose 1.2 percent to 2,099.50 points, while the Nasdaq composite rose 0.9 percent to 4,982.83 points. Similarly, emerging markets felt the positive impact of a delay in further US monetary tightening. The US dollar, which has been experiencing bullish momentum since the Federal Reserve started to wind down its massive quantitative easing program, fell against most currencies after the statements of the Federal Reserve. The Indonesian rupiah exchange rate, which had depreciated to a 17-year low against the US dollar, rebounded and had appreciated 1.25 percent to IDR 13,013 per US dollar at 10:15 am local Jakarta time on Thursday (19/03) according to the Bloomberg Dollar Index, while the benchmark stock index of Indonesia (Jakarta Composite Index) had climbed 0.61 percent to 5,446.15 by the same time.

As Indonesian stock and financial markets are dominated by foreign investors, these markets are particularly vulnerable to global happenings. For example, when the USA started its loose monetary policy (historic low interest rates and the massive quantitative easing program in the late 2000s), Indonesia received a significant amount of capital inflows. At the same time, however, it makes Indonesia highly vulnerable to capital outflows in times of global shocks (for example the looming interest rate hike in the USA), particularly as the country is plagued by a wide current account deficit. The central bank of Indonesia expects that this deficit will widen to 3 percent of gross domestic product (GDP) in 2015, from 2.95 percent of GDP last year. The current account deficit means that Indonesia is building up liabilities to the rest of the world that are financed by inflows in the financial account.

Bank Indonesia's benchmark rupiah rate (Jakarta Interbank Spot Dollar Rate, abbreviated JISDOR) appreciated 1.19 percent to IDR 13,008 per US dollar on Thursday (19/03).

Indonesian Rupiah versus US Dollar (JISDOR):

| Source: Bank Indonesia