Rupiah and BI Interest Rate

KOMPAS/RADITYA HELABUMI

The monitor screen displays the movement of Composite Stock Price Index (JCI) in Indonesia Stock Exchange, Jakarta, Friday (18/5/2018). Closing trading on the first weekend of Ramadhan, JCI closed down 0.56% or 32.61 points to 5,783.31.

As anticipated, Bank Indonesia (BI) finally raised its benchmark interest rate by 25 basis points on Thursday. The central bank has also hinted there would be another interest rate hike.

The measure to raise the interest rate was taken in order to stabilize the rupiah, amid strong pressure resulting from the massive withdrawal of foreign funds. The withdrawal of foreign funds from Indonesia and other developing countries is mainly triggered by external factors such as those related to the plan of the United States central bank to raise interest rates at least three times until the end of 2018.

BI\'s 7-day Reverse Repo Rate was raised by 25 basis points to 4.5 percent. It was the first increase since September 2017. Although already anticipated by the market, the rise in interest rates is expected to receive a positive response from investors. On Friday, the rupiah and the Jakarta Composite Index (JCI), the main price index in the Indonesia Stock Exchange (IDX), remained under pressure. However, the rate hike is expected to be able to halt the fall in the Indonesian currency.

The move to raise the reference interest rate will not be able to immediately ease the foreign capital outflows, but the measure at least gives a strong signal that BI will take various measures necessary to protect the rupiah.

In facing the harsh situation and uncertainties in the future, such positive signals are necessary to gain trust. In this regard, BI\'s measure to raise interest rates also needs to be accompanied by other macroprudential and microprudential policies to support all the efforts to ease the pressure on the rupiah, which has so far brought a domino effect to various sectors of the economy.

In addition to the impact of the rise in the US interest rates, the pressure on the rupiah is also potentially triggered by the need for a large amount of foreign exchanges to pay debts and dividends in the middle of the year. Similarly, rising world crude oil prices will also increase the need for foreign exchange to import crude oil and fuel. They will potentially depress the rupiah.

The high foreign ownership in the government’s bonds also increasingly put Indonesia in a vulnerable position against the possibility of foreign capital outflow. Therefore, in addition to monetary measures, fiscal measures and policy incentives are also needed to cope with pressures on the economy, as well as to restore the confidence so that investors will enter and stay in Indonesia.

The fiscal measures may include immediate revisions or adjustments to the state budget, sharpening of scales of the priorities, new stimuli and breakthroughs. Such as fiscal facilities are needed in order to overcome the pressure and uncertainty, both from external and internal factors, which could in turn affect the rupiah and economic growth.

One of the most serious pressures is the rise in crude oil prices. With rising crude oil prices, the fuel subsidy cost and budget deficit will also increase as the President Joko "Jokowi" Widodo administration has promised not to raise fuel prices until 2019. The increase in the interest rate also pushes up the yields of the government bonds, which have to be paid by the government.

Facing the various shocks that may arise, both external and domestic, requires not only stamina, but also new breakthroughs and solid coordination from all sides. We hope that under such circumstances, there will be no maneuvering from certain parties, which can undermine the market confidence, especially in the vulnerable period during the political year.