The Fed Interest Rate Hike: Government Prepares Debt Diversification

The 25 basis point (bps) increase in the Federal Reserve’s interest rate to 3.75%-4.00% has the potential to increase pressure on the rupiah and the financing costs of government debt.

Deputy Finance Minister Juda Agung stated that the Fed’s rate hike could trigger repricing or adjustments in the price and yield of government debt instruments. However, he assessed that the situation remains within reasonable levels.

“Yes, I believe there will certainly be repricing. But I think it is still at a reasonable level,” Juda said at the Parliament Complex, Jakarta, on Thursday.

Juda mentioned that the government continues to diversify its financing sources to anticipate changes in global financial market conditions, one of which is through the issuance of Panda Bonds in the Chinese market.

“Yes, that remains. Panda Bonds remain a priority,” he said.

Regarding plans for global bond issuance, Juda did not detail the value or timing. He stated that the government would provide updates regarding these plans, including the remaining quota for global bond issuance.

The Fed’s rate hike is the first since 2023 and stands in contrast to pressures from US President Donald Trump, who has called for lower interest rates. The decision was made unanimously by the Federal Open Market Committee (FOMC). Fed Chair Kevin Warsh stated that the hike was necessary to control inflation, which is deemed too high and has persisted for too long.

According to the Summary of Economic Projections (SEP), at least 12 of the 18 participating Fed officials anticipate one more rate hike before the end of the year, while four officials foresee two additional hikes.

In response to the tight US monetary policy, Indodax noted a positive response in Bitcoin, which breached US$76,000. Liza Camelia Suryanata, Head of Research at Kiwoom Sekuritas Indonesia, warned of potential capital outflows resulting from the Fed’s rate hike and the US 10-year Treasury yield.

The Jakarta Composite Index (IHSG) strengthened by 0.40% to 6,462.43 on Thursday afternoon. The market is now awaiting a response from Bank Indonesia following the Fed’s decision.