New Bank Indonesia Governor is wasting no time on rate hikes

Indonesia's new central bank governor set the stage for a second interest rate increase in two weeks at an early policy meeting called for Wednesday, as he wastes little time in acting against a currency rout.
MAY 28, 2018 - 1:45 PM

[JAKARTA] Indonesia's new central bank governor set the stage for a second interest rate increase in two weeks at an early policy meeting called for Wednesday, as he wastes little time in acting against a currency rout.

A day after Governor Perry Warjiyo was sworn into office, Bank Indonesia announced the monetary policy board will meet this week, about a month before its next regular monthly scheduled one. The move helped to boost the currency 1 per cent against the dollar on Monday, the best performer in Asia, and pare back its decline for the year to 3 per cent.

Mr Warjiyo had pledged to act early and be ahead of the curve when it comes to policy, a stance he reiterated on Monday. He told reporters in Jakarta the out-of-cycle meeting is a pre-emptive step ahead of the Federal Reserve's next policy decision on June 14.

That would give Bank Indonesia the chance to adjust policy before the Fed's expected tightening move. Indonesia's regular monthly meeting was scheduled for two weeks after the Fed decision.

Like central banks in emerging markets from Argentina to Turkey, Bank Indonesia is stepping up its action to stem a global rout triggered by rising US interest rates and a stronger dollar.

The central bank in Southeast Asia's biggest economy is seen increasing the benchmark rate by 25 basis points from 4.5 per cent, according to 10 of the 17 economists surveyed by Bloomberg. Others don't expect a rate move, but an expansion of macro-prudential measures to maintain stability.

The central bank governor said on Monday macro-prudential policy will be eased to support economic growth. He spoke after a joint meeting with Finance Minister Sri Mulyani Indrawati, Coordinating Minister for Economic Affairs Darmin Nasution and Financial Services Authority Chairman Wimboh Santoso.

If past experience is anything to go by, a rate hike is on the cards. The central bank has had two unscheduled meetings in the past decade, in November 2014 and August 2013, and raised rates both times.

"Looking at the global trend, particularly the possibility of further increases in U.S. interest rate, I think Bank Indonesia will certainly increase its key rate," said Andry Asmoro, an economist at PT Bank Mandiri in Jakarta. "We still maintain our forecast that Bank Indonesia will increase its rate twice this year and once next year."

Market Intervention

Global funds have dumped a net US$2.1 billion of Indonesian sovereign bonds since the end of March and pulled US$1.2 billion from the shares, pushing the rupiah to a fresh low of 14,213 against the dollar last week.

Bank Indonesia has tried to quell the investor exodus by intervening in the currency and bond markets, spending 50 trillion rupiah to buy sovereign bonds from the secondary market and announcing forex swap auctions to ensure adequate liquidity.

The governor "has made comments quite recently about being proactive with regard to using interest rates as a tool to stabilize the currency, so yes, I would agree the risk of seeing another interest rate hike pretty soon is fairly high," Andrew Tilton, chief Asia-Pacific economist for Goldman Sachs Group Inc., said in an interview on Bloomberg Television on Monday.

Inflation Target

In 2013, when the currency came under severe selling pressure during the so-called "taper tantrum," Bank Indonesia responded with aggressive action, raising interest rates by 175 basis points in just five months. With key economic indicators much stronger now, the central bank doesn't need to take the same tough approach.

Inflation is better controlled now at 3.4 per cent, well within the target band of 2.5 per cent to 4.5 per cent, and compared with a peak of 8.2 per cent in 2013. Reserves are also in a stronger position at about US$125 billion even though the central bank has drawn more than US$7 billion since the end of January.

A rate increase may help the central bank address the perception in some quarters that it's behind the curve, said David Sumual, the chief economist at PT Bank Central Asia.

"The purpose of this hike will not be for attracting foreign portfolio inflows but to avoid a further selloff," Mr Sumual said. "They may want to maintain the country's current account stability in a more solid foothold."