Indonesia raises rates in surprise move to prop up sinking rupiah<\/p>\n
The rupiah has been under pressure due to a wide range of investor\nworries, including President Prabowo Subianto\u2019s big spending plans and a\nballooning fuel subsidy budget following the Iran war.<\/p>\n
JAKARTA: Indonesia\u2019s central bank raised interest rates by 25 basis\npoints on Tuesday (Jun 9) in an unexpected off-cycle rate hike, taking\nthe benchmark rate to 5.50 per cent as it moves to stabilise the rupiah,\nwhich has hit a series of record lows.<\/p>\n
Bank Indonesia (BI) said in a statement posted on its website that\nthe off-cycle rate hike was necessary because \u201cthe rupiah exchange rate\nhas weakened more than expected\u201d since its last meeting.<\/p>\n
The bank was scheduled to meet next week with the rupiah coming under\nmounting pressure after falling 8 per cent this year and 7 per cent\nsince the Iran war erupted, making it one of the world\u2019s\nworst-performing currencies.<\/p>\n
The currency strengthened slightly to 18,075 after the decision, a\nday after touching another record low of 18,190 per US dollar. In the\npast three weeks it experienced its steepest drop since 2020.<\/p>\n
BI hiked rates by a higher than expected 50 basis points in its last\nmeeting in May. But even that hike and a US$12 billion drop this year in\nIndonesia\u2019s foreign exchange reserves, which the central bank uses to\ndefend the rupiah, have not been able to shore up the currency.<\/p>\n
\u201cThis rate hike is a further step to strengthen the rupiah\u2019s exchange\nrate stabilisation against the impact of high global volatility caused\nby the war in the Middle East and a preemptive measure to maintain\ninflation in 2026 and 2027 within the target range,\u201d BI said.<\/p>\n
The rupiah has been under pressure due to a wide range of investor\nworries, including President Prabowo Subianto\u2019s big spending plans and a\nballooning fuel subsidy budget following the Iran war, along with doubts\nabout the central bank\u2019s autonomy and controversial new commodity export\npolicies.<\/p>\n
Meanwhile, the central bank\u2019s escalating interventions in the\ncurrency markets have drained Indonesia\u2019s forex reserves to their lowest\nlevel in nearly two years. They dropped by US$1.3 billion in May to\nUS$144.9 billion, despite the government\u2019s US$3.5 billion sale of US\ndollar- and euro-denominated bonds last month.<\/p>\n
OTHER MEASURES IN PLACE TO STRENGTHEN RUPIAH<\/p>\n
BI also said its policy intended to increase returns by attracting\nforeign portfolio investment inflows into Indonesia.<\/p>\n
Bond yields in peer economies like Mexico, India, and the Philippines\nare already high, David Sumual, Chief Economist at Bank Central Asia\n(BCA) said.<\/p>\n
\u201cFor this, maybe we indeed need to be more aggressive because if we\nlook at the SRBI (BI rupiah denominated securities) rate, it is already\nat 7.25 per cent, which is even higher,\u201d Sumual added, referring to the\n12-month rate.<\/p>\n
Barclay\u2019s said in an analyst note that the central bank was also\nusing other measures to attract capital inflows, including a 10 per cent\nreduction in the hedging swap rate for foreign investors as well as\nhigher 6-, 9- and 12-month SRBI yields.<\/p>\n
It added that it expected another hike of 25 basis points in next\nweek\u2019s meeting, taking rates to 5.75 per cent, with the possibility of a\nlarger, 50bp move.<\/p>\n
It noted that such back-to-back moves have a precedent. BI hiked its\npolicy rate by 50 basis points in an off-cycle meeting in 2013 and then\ncut it by 25 basis points just days later in a scheduled meeting.<\/p>\n
Barclay\u2019s said that BI could start making cuts if the rupiah is\nstabilised.<\/p>\n
BI TO CONTINUE INTERVENTION<\/p>\n
Speaking at parliament in a session about next year\u2019s economic\nprojections, BI chief Perry Warjiyo said that the bank did not want to\nincrease rates, but did so to make its assets more attractive.<\/p>\n
He said he projected the rupiah to stand between 16,800 to 17,500 to\nthe dollar in 2027, adding that the bank would continue to focus on\nstabilising the currency through foreign exchange interventions in\noffshore and onshore markets.<\/p>", "url": "https:\/\/jawawa.id\/newsitem\/indonesia-raises-rates-in-surprise-move-to-prop-up-sinking-rupiah-1780998610", "image": "" }, "sponsor": "Okusi Associates", "sponsor_url": "https:\/\/okusiassociates.com" }