Analysts expect no local impact from Fed rate hike
The Jakarta Post, Jakarta
An imminent hike in the U.S. interest rate, most likely to be decided on in this week's Federal Reserve meeting, will have a limited impact here with Bank Indonesia unlikely to follow suit in raising rates, according to analysts.
Even if the central bank does increase rates, it would be at a slower pace than the Federal Reserve, Citigroup economist Anton Gunawan said over the weekend.
"Aside from oil prices, domestic factors such as inflation and the rupiah pose more of a threat to local interest rates than external (factors).
"Especially as the expected U.S. rates hike will only take place gradually," Anton said, predicting that the Fed's rate hike would not be higher than 25 basis points.
Having raised rates for the first time in four years on June 30, the Fed is widely expected to raise rates further during a meeting on Aug. 6.
The meeting follows recent U.S. economic data showing that inflation rose at 3.3 percent rate in the second quarter, on par with the first-quarter's pace.
However, core inflation -- which excludes volatile food and energy prices -- only rose by a modest 1.8 percent, lower than the 2.1 percent increase in the previous quarter. The slowdown in the core inflation rate is seen as a cause for the Fed to increase rates gradually.
At present, the U.S. benchmark rate stands at 1.25 percent.
"Citigroup predict the U.S. rate will reach 2 percent by the end of the year. I do not think Bank Indonesia will follow the Fed by raising the local rate by 0.75 percent until next year," Anton said.
He said that while the volatility of the rupiah -- which plays of factor in inflation -- was expected to continue at least until after a new government was formed, the local currency would begin to rebound heading toward the end of the year and reduce inflationary pressure.
"With a controlled full-year inflation, maybe less than 7 percent, I think the SBI (the central bank's benchmark promissory notes) will reach no higher than 7.75 percent at the end of the year," Anton said.
The SBI currently is at 7.36 percent.
StanChart economist Fauzi Ichsan predicted a similar rate for the SBI, betting on a rebound in the rupiah after the elections were completed as the dollar began to feel the pinch of the U.S.'s huge trade and current account deficit.
The easing political uncertainty, Fauzi said, coupled with the U.S. dollar's expected shaky footing, "are likely to help the rupiah rebound to 8,500 per dollar if not stronger by the end of the year".
He forecast that the one-month SBI rate would likely increase only to 7 percent by the end of the year, a slower increase than the expected rise in the U.S. interest rate.
Fauzi and Anton also agreed that the central bank had less incentive to raise the interest rate because this would push up its monetary costs, given the huge amount of excess liquidity from the banking sector currently stashed in BI's investment facilities, such as SBIs and the overnight placement facility (FASBI).
Some Rp 20 trillion to Rp 40 trillion of excess liquidity are placed daily at the central bank through the SBI and FASBI.