Bank Indonesia’s Tactical Move

Although it had been predicted, Bank Indonesia\'s move to raise its benchmark interest rate is expected to receive a positive response from investors. The move is also expected to protect the rupiah.

KOMPAS/RADITYA HELABUMI

A teller shows US$100 bills at PT Bank Negara Indonesia (Persero) on Wednesday (16/5/2018) in Jakarta. According to the Jakarta Interbank Spot Dollar Rate (Jisdor) reference rate, Wednesday’s rupiah rate was Rp 14,094 to the US dollar.

JAKARTA, KOMPAS – Bank Indonesia (BI) has finally realized its plan to raise its benchmark interest rate. The decision to increase the key interest rate by 25 basis points (bps) to 4.5 percent was made during the central bank’s board of governors meeting on Thursday.

BI made the plan to raise the rate last week. The benchmark rate, or the 7-day Reverse Repo Rate (7DRRR) of 4.25 percent had been effective since September 2017. It is believed the central bank’s move will receive a positive response from investors, even though the rise in the benchmark interest rate had been expected.

On Thursday, during the BI board of governors meeting, the central bank also raised the rupiah deposit facility interest rate to 3.75 percent and the rupiah lending facility interest rate to 5.25 percent.

Anton Hermanto Gunawan, chief economist at Bank Mandiri (Persero), said that the decision to raise the BI interest rate was a tactical move to give a positive signal to foreign investors. It was expected that the 25 bps increase in the interest rate would not affect Indonesia\'s economic growth, he said.

"There is still a possibility that BI will raise the interest rate again," said Anton on Thursday at an economic briefing in Jakarta. The central bank may further increase its interest rate because there is a possibility that the United States Federal Reserve (the Fed) will raise its benchmark rate three more times until the first quarter of 2019.

Bank Mandiri senior economist Andry Asmoro said that with foreign investors holding 40 percent of Indonesian bonds, the BI rate raise gave a positive signal to investors. Foreign investors would consider Indonesia\'s macroeconomic condition and the policies the government has taken to cope with global pressures.

"The two are the most important things to be considered in managing expectations," added Andry.

Meanwhile, PT Bank Permata economist Josua Pardede said the increase in the BI reference rate was an initial step to maintaining the rupiah’s stability. According to the Jakarta Interbank Spot Dollar Rate (Jisdor), the rupiah was traded at Rp 14,074 per US dollar.

Since May 8, the rupiah exchange rate has been hovering at around Rp 14,000 against the dollar.

Josua said that the 25 bps increase in the interest rate could affect the Indonesian economy by also pushing up lending rates. If that happened, it would hold back efforts to strengthen economic growth.

Association of Indonesian Entrepreneurs (Apindo) chairman Hariyadi Sukamdani said the increase in BI reference rate could not be avoided, because it was needed to prevent the rupiah from weakening further. Moreover, BI’s market intervention to stabilize the rupiah could further drain foreign exchange reserves.

"Indonesia\'s foreign exchange reserves are not so large. Foreign exchange earnings from exports have not been optimal, either because of the industry slowdown or because they are being kept abroad," he said. Indonesia\'s forex reserves at the end of April 2018 was US$124.862 billion.

Hariyadi said that the rate hike could affect business activities by leading to an increase in lending rates, which could in turn result in an increase in business costs. Business players could respond to the higher rate by improving efficiency or by raising the price of goods.

KOMPAS/IWAN SETIYAWAN

Agus DW Martowardojo

Stability

Speaking during a press conference, BI Governor Agus DW Martowardojo said that the global economy was projected to grow by 3.9 percent this year. However, the strengthening of the world economy had led to tightening the US dollar liquidity, which in turn pushed up US bond yields and strengthened the US dollar, thus pressuring other currencies, including the rupiah, he said.

The rupiah depreciation potentially affected the rise in inflation. In fact, high inflation could weaken the rupiah further. "For that [reason], we decided on a policy mix, one of which is to raise the BI 7-day Reverse Repo Rate. We are also continuing efforts to stabilize the rupiah exchange rate in accordance with the condition of economic fundamentals by ensuring that the market mechanism is working," said Agus.

According to Agus, the policy was also supported by monetary operations in order to maintain the availability of liquidity in the foreign exchange and money markets. "BI continues to monitor global and domestic economic developments. If necessary, BI is ready to take firm steps to maintain economic stability," he said.

BI senior deputy governor Mirza Adityaswara said Indonesia relied much on foreign financing to cope with its current account deficit. The financing comes from foreign debt, foreign portfolio investments and foreign direct investments. The flow of foreign capital was quite large and prone to sudden withdrawal from Indonesia and other developing countries. Other countries had raised theirs interest rates to retain foreign capital.

"BI raised its benchmark interest rate. One of its goals is to retain the foreign funds, and the other one is to maintain inflation," said Mirza.

Meanwhile, William Surya Wijaya, an analyst at Indosurya Bersinar Securities, said the market had expected the central bank to raise its interest rates. Most investors held onto transactions until there was certainty on the increase in the benchmark interest rate.

"Thus, there is a possibility that the JCI [Jakarta Composite Index] will increase," said William. On Thursday, the JCI fell 0.437 percent to close at 5,815.92. The JCI had lost 8.49 percent since the beginning of the year. In ASEAN, share price indexes that fell lower than the JCI was the Philippine stock exchange index, which declined 10.1 percent this year.

(HEN/DIM/JUD)