Rupiah and interest rates<\/p>\n
The move by Indonesia's central bank last week to
\nsignificantly raise the ceiling interest rates on time deposits
\nunder the blanket guarantee scheme should be welcomed as a
\ncorrect and timely measure to save the rupiah exchange rate from
\nwild volatility.<\/p>\n
Indeed, with two of the world's largest economies -- the
\nUnited States and China-- about to tighten their monetary
\npolicies to ward off inflation, countries like Indonesia that
\ngreatly depend on the export market for economic growth should
\nmake the necessary adjustments.<\/p>\n
Bank Indonesia early last week raised the ceiling interest
\nrates on one-month to two-year time deposits from a range of 6.11
\npercent to 6.18 percent, to 7.25 percent to 7.80 percent, under
\nthe government's blanket guarantee program. This move gives banks
\nmore leeway to increase the interest rates they can offer
\ndepositors.<\/p>\n
The rupiah fell to as low as Rp 8,734.50 against the U.S.
\ndollar last week, slightly below the floor of the Rp 8,200 to Rp
\n8,700 range, or the comfort zone, the central bank has pledged to
\nmaintain for the local unit.<\/p>\n
A combination of internal factors -- security disturbances in
\nMaluku, Makassar and Riau -- and external factors, notably the
\ntighter money policy imposed by China and strong speculation of a
\nsimilar monetary move in the U.S, which strengthened the American
\ndollar, were responsible for the negative sentiment on the
\nrupiah.<\/p>\n
Even though the U.S. Federal Reserve has yet to raise its
\nfunds rate, something that has been widely predicted by financial
\nmarket analysts over the last two months, Bank Indonesia's
\ndecision last week was nevertheless the right move. Almost all
\npundits have predicted a rise in the Fed's funds rate as
\ninevitable, saying it is only a matter of time. Many expect it in
\nJune, while some other analysts foresee such a move in August.<\/p>\n
Obviously, Bank Indonesia cannot make its interest rate policy
\nindependent from its exchange rate policy. If the central bank is
\ncommitted to maintaining the rupiah in its \"comfort zone\", it
\nconsequently must raise interest rates in anticipation of the Fed
\nrate hike, otherwise many big depositors may shift to dollar
\npositions.<\/p>\n
Bank Indonesia is right in asserting that the weakening of the
\nrupiah is only a temporary phenomenon that will soon pass because
\nthe fundamentals of the economy remain strong.<\/p>\n
Movements in financial markets rarely reflect changes in
\neconomic fundamentals, because they are based on the market
\nperception of what is likely to happen and this perception is
\nformed mainly by the information market players currently have.<\/p>\n
The perception now is that the American dollar will strengthen
\nbecause of the upcoming move to be taken by the Federal Reserve
\nto tighten its monetary stance to ward off inflation. Without
\nadjustments to its domestic interest rates, the rupiah may come
\nunder attacks because many depositors may realign the composition
\nof their deposits in favor of the greenback.<\/p>\n
Even last week's monetary measure now makes it possible for
\ncommercial banks to raise their deposit rates to as high as 7
\npercent, most major banks will most likely maintain their rates
\nat their current range of 5.5 percent to 5.7 percent because they
\nare still awash with excess liquidity.<\/p>\n
Just see how the central bank has steadily lowered its
\nbenchmark interest rate on certificates of deposit from as high
\nas 8.3 percent early this year to 7.32 percent last week, and yet
\ncommercial banks remain hesitant to accelerate the pace of their
\ncorporate lending due to the high risk of credit turning sour.<\/p>\n
The uncertainty that will remain until the country's
\nelections are completed in September further adds to the banks'
\noverly cautious stance on lending.<\/p>\n
Bank Indonesia's latest monthly report showed that as of
\nMarch, commercial banks' outstanding balance in such central bank
\nopen-market instruments as SBIs remained quite high at more than
\nRp 155 trillion (US$18.3 billion). Most analysts estimate that
\nthe loan to deposit ratio within the banking industry is hovering
\nat about 50 percent. As long as the SBI rate remains much higher
\nthan deposit rates, banks will not feel compelled to expand their
\nlending.<\/p>\n
We therefore see this latest monetary measure by the central
\nbank more as a preemptive move to protect the rupiah against
\nspeculative attacks, rather than an attempt to prod banks into
\nraising their deposit rates.<\/p>",
"url": "https:\/\/jawawa.id\/newsitem\/rupiah-and-interest-rates-1447893297",
"image": ""
},
"sponsor": "Okusi Associates",
"sponsor_url": "https:\/\/okusiassociates.com"
}