Apparently, the Federal Reserve’s message that it would still wait before raising US interest rates only implied a brief weakening of the US dollar against emerging Asian currencies. On Friday (20/03), the Indonesian rupiah depreciated 0.51 percent to IDR 13,124 per US dollar according to the Bloomberg Dollar Index. Current high volatility is also the result of different policies being executed by different central banks. Whereas the US Federal Reserve aims to further tighten monetary policy, central banks in Japan and Europe do the opposite.

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Indonesian stocks and the rupiah exchange rate strengthened rapidly on Thursday (19/03) after the Federal Reserve refrained from raising its key interest rate at the two-day FOMC meeting that ended on Wednesday (18/03) as US inflation is still tame while US economic growth somewhat moderated. The US central bank signaled that it is not in a hurry to raise interest rates, but, on the other hand, it also dropped the word ‘patient’ from its guidance on interest rates (which have been at historic lows since late 2008).

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The central bank of Indonesia (Bank Indonesia) decided to maintain its benchmark interest rate at 7.50 percent at today’s Board of Governors’ Meeting. The overnight deposit facility rate and lending facility rate were maintained at 5.50 percent and 8.00 percent, respectively. Bank Indonesia considers that the current interest rate environment is in line with its target to push inflation within its target range of 3.0-5.0 percent (y/y) in 2015 and to curb the country’s current account deficit to a range of 2.5-3.0 percent of gross domestic product (GDP).

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Regarding Indonesia, the spotlight remains sharply focused on the drastically depreciating rupiah exchange rate. As speculation is growing that the US Federal Reserve will soon raise its interest rate regime, emerging market assets (both currencies and stocks) tend to weaken. However, although most Asian emerging currencies are weakening against the US dollar, the rupiah is particularly vulnerable as Indonesia is plagued by a wide current account deficit, which informs investors that the country is relying on foreign capital inflows.

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Indonesian stocks and the rupiah exchange rate are feeling the negative impact of the bullish US dollar on Monday (09/03) after stronger-than-expected US payrolls fuel expectation that the US Federal Reserve may start to raise its key interest rate in June. Moreover, last week Fed Chair Janet Yellen had already signalled to Congress that the US central bank may lessen its ‘patient stance’ on a looming interest rate hike. The benchmark Jakarta Composite Index fell 1.25 percent to 5,445.84 points on Monday’s first trading session (09/03).

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Indonesian inflation is expected to have eased further in February 2015 on lower food prices. One notable exception, however, is rice. Rice prices have soared approximately 30 percent year-on-year (y/y) up to IDR 12,000 per kilogram in February. Higher rice prices have been caused by distribution obstacles for Raskin (‘rice for the poor’) operations in combination with this year’s late harvest season (between March and June). Fluctuation in prices of rice, the staple food of 250 million Indonesians, has a significant impact on inflation in Indonesia.

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After Federal Reserve Chairwoman Janet Yellen indicated that the US central bank will be patient in raising the interest rate environment in the world’s largest economy, Indonesian assets gained on Wednesday (25/02). Both the benchmark Jakarta Composite Index and rupiah exchange rate strengthened 0.51 percent yesterday. Apart from increased speculation that the Fed will not raise interest rates before summer, expectation that Greece will avoid a disastrous default brought more positive market sentiments.

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Indonesia’s rupiah depreciated to its lowest level since mid-December 2014 nearly touching the psychological level of IDR 13,000 per US dollar ahead of Federal Reserve Chairwoman Janet Yellen appearance before the US Senate Banking Committee and the US Congress (in a two-day meeting) to elaborate on the Fed’s stance on US interest rates. As US jobless claims fell more than expected, analysts believe that it will not take long before the US central bank introduces higher borrowing costs in the world’s largest economy.

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The benchmark stock index of Indonesia (Jakarta Composite Index) edged higher on Monday (23/02) to set another all-time record high supported by foreign investors’ net buying (IDR 708.2 billion), optimism that Greece will not default on its debt or exit from the Eurozone, and on gaining Southeast Asian stock markets (while markets in China were still closed due to Chinese New Year). Meanwhile, the Indonesian rupiah exchange rate depreciated 0.09 percent to IDR 12,836 per US dollar according to the Bloomberg Dollar Index.

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Benedict Bingham, Senior Resident Representative for Indonesia at the International Monetary Fund (IMF), expects that the central bank of Indonesia (Bank Indonesia) will remain committed to the tighter monetary policy in a bid to safeguard the country’s fiscal fundamentals amid external pressures. Apart from sluggish global economic growth, the looming interest rate hike in the USA (later this year) is expected to rock Indonesia as it will trigger capital outflows from emerging markets.

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The financial markets have had an interesting year in 2015, with several significant surprises seen in the major asset classes. On the whole, 2015 could probably be best described as a year of stabilizing with stocks and commodities holding mostly steady throughout the period. This has been largely true in the currency markets, as well. But there are some factors that are likely to influence trends for world currencies in new ways in 2016. Central banks in some regions will likely have significant influence in others, and investors will need to remain aware of the possibilities early in order to position for potential trend chances in critical areas.

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Global credit rating agency Moody's Investors Service expects loan growth in Indonesia to continue to slow in 2016 as sluggish economic growth curtails corporate and individual demand for funding in Southeast Asia's largest economy. Meanwhile, a survey conducted by Standard & Poor's shows that the majority of Indonesians are financially illiterate, implying that the government needs to increase efforts to educate its population. Lastly, Asian Development Bank President Takehiko Nakao is convinced that a US interest rate hike will not cause a new financial crisis in Asia. Lets zoom in a bit further on these three subjects.

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The central bank of Indonesia (Bank Indonesia) is expected to keep its benchmark interest rate (BI rate) relatively high in order to safeguard Indonesia's financial stability in 2016 (instead of seeking accelerated economic growth through a rate cut). Despite easing pressures on inflation and the country's current account balance, Bank Indonesia Governor Agus Martowardojo said that persistent global uncertainty (referring to the looming US Fed Fund Rate hike and China's slowdown) justifies the tight monetary stance.

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Indonesian assets weakened on Friday (06/11) on expectation that US non-farm payrolls and US employment data would improve, suggesting that a Fed Fund Rate hike may occur in December 2015. Such expectations were correct. After Indonesian and other Asian markets had closed on Friday, the US Labor Department announced that October payrolls rose 271,000 (the largest increase this year), while the US unemployment rate touched a seven-year low at 5 percent. Furthermore, the average hourly earnings over the past 12 months climbed by the most since 2009.

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As Indonesia's inflation rate has eased to 6.25 percent (y/y) in October 2015 from 6.83 percent (y/y) in the previous month, and given that Indonesian inflation will ease more markedly in the last two months of 2015 as the impact of the subsidized fuel price hike in November 2014 will vanish, the central bank of Indonesia (Bank Indonesia) seems to have more scope to cut its current relatively high benchmark interest rate, hence giving rise to accelerated economic activity.

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Today (22/10), the World Bank released the October 2015 edition of its flagship Indonesia Economic Quarterly, titled "In Times of Global Volatility". In the report the World Bank states that despite current ongoing global uncertainties (caused by looming monetary tightening in the USA and China's economic slowdown), which make macroeconomic management difficult in the year ahead, pro-active government action could offset the negative impact and may help to boost growth.

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After the release of US non-farm payrolls on Friday (02/10) markets are starting to doubt whether the Federal Reserve has room to raise its key Fed Fund Rate at all in 2015. In September a total of 142,000 jobs were added to the US economy, well below the market consensus of 201,000. Moreover, August non-farm payrolls were revised down to 136,000 (from 173,000 initially). It was the first time since mid-2013 that US jobs grew at such a slow pace in two consecutive months. So far in 2015 US non-farm payrolls grew at an average of 198,000 per month, significantly down from the average growth pace of 260,000 per month last year.

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The central bank of Indonesia announced on Thursday (17/09) that it the country’s key interest rate (BI rate) at 7.50 percent, while maintaining the deposit facility rate at 5.50 percent and the lending facility rate at 8.00 percent. According to Bank Indonesia (BI) this decision is consistent with its efforts to push inflation towards the target corridor of 4±1 percent in both 2015 and 2016. In addition, the decision is also part of Bank Indonesia’s measures to anticipate possibilities of a Fed Fund Rate (FFR) hike.

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After a real roller coaster ride, Indonesia’s benchmark stock index (Jakarta Composite Index) climbed 0.35 percent to 4,446.20 points at the end of the trading week. The majority of key stock indices across the globe tended to strengthen on Friday after a week characterized by severe volatility amid concern about the economic situation in China.

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During Bank Indonesia’s Board of Governors it was decided on 18th August 2015 to hold the BI Rate at 7.50 percent, while maintaining the Deposit Facility rate at 5.50 percent and the Lending Facility rate at 8.00 percent. The decision is consonant with efforts to control inflation within the target corridor of 4±1 percent in 2015 and 2016. In the short term, Bank Indonesia (BI) is focused on efforts to stabilize the rupiah amid uncertainty in the global economy, by optimizing monetary operations in the rupiah and the foreign exchange market.

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