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Economy

Bank Indonesia raises interest rates for second time in a month

Extraordinary meeting follows new governor's vow to act 'pre-emptively'

Indonesia's central bank Bank Indonesia is raising interest rates again in a pre-emptive move to stabilize the rupiah.   © Reuters

JAKARTA -- Indonesia's central bank has raised its interest rate for the second time this month as the new governor Perry Warjiyo takes a more pre-emptive approach to the country's falling currency.

Bank Indonesia on Wednesday decided in an extraordinary policy meeting to hike its bench mark seven-day repo rate by 25 basis points to 4.75%, a mere two weeks after the central bank decided in a regular meeting to raise its interest rate for the first time in three and a half years, by 25 basis points to 4.50%.

The latest decision comes as the initial rate hike, decided under the previous Governor Agus Martowardojo, failed to stop the fall of the Indonesia rupiah. The currency fell to its lowest rate against the dollar since October 2015 last Wednesday, and has fallen around 3.4% against the greenback since the start of the year, as the U.S. Federal Reserve continues on its path to monetary policy normalization.

The extraordinary meeting -- announced by the central bank last Friday -- and the raising of interest rates are in accordance with the newly appointed Warjiyo's remarks that the bank plans to be "more pre-emptive" in its approach to stabilizing the rupiah.

The U.S. Federal Reserve will meet on June 14, where it is expected to announce a further interest rate rise, while Bank Indonesia's regular June meeting falls on June 28, later than usual due to the Islamic holiday of Idul Fitri. Market conditions have become more favorable to Indonesia in recent days, in particular due to the fall in oil prices, but Warjiyo decided that in order for the central bank to stay ahead of the curve, an ad hoc meeting and a rate hike at this juncture were necessary.

"Bank Indonesia continues to pursue various strategies to curb the weakening of the rupiah against the U.S. dollar," said the governor at a news conference after the meeting, adding that the bank wanted to "respond to the dynamics occurring abroad" that have caused "irrational impacts" on Indonesia. 

"Going forward," Warjiyo said, "Bank Indonesia will continue to calibrate global and domestic market developments to utilize room for further rate hikes in a measured way."

The slide of the rupiah against the greenback is cause for increasing concern for the country's business community, which has seen dollar denominated debt increase by 43% between the second quarter of 2013 and May 2018. Indonesian companies, excluding the financial sector, had $99 billion in outstanding dollar debts from a combination of bank loans and bond issuance, according to Dealogic.

Bank Indonesia had embarked on a series of rate cuts between 2015 and 2017, as President Joko Widodo aimed to facilitate lending and boost growth. But despite the accommodative policy, the economy has been slow to grow beyond the average year-on-year rate of 5.1% as seen over the past five years.

The latest gross domestic product data also disappointed, showing growth of only 5.06% on an inflation adjusted basis, short of a consensus forecast of 5.18%.

"From the perspective of [Bank Indonesia], a total of 50 [basis points] in hikes year-to-date ... is likely still consistent with a neutral policy stance," said Joseph Incalcaterra, senior economist for ASEAN at HSBC, in a report issued before the ad hoc meeting. "However, with 50bp of hikes, smaller banks dependent on interbank borrowing -- rates for which are linked to the 7-day reverse repo -- may adjust lending rates higher, presenting some downside risks to credit growth."

But Warjiyo said that besides the interest rate increase, the central bank has other tools to help prop up the economy.

"There is a presumption that if BI raises interest rates ... economic growth may decline. In fact, the condition only occurs when the economic and monetary instruments are only one, namely the interest rate," he said.

"Bank Indonesia has many instruments, such as macroprudential policies, payment systems... other pro-growth instruments."

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