Indonesia Taps New Tool to Aid Rupiah as Rates Kept Steady

Indonesia’s central bank tapped tools other than interest rates to help the rupiah weather an emerging-market selloff triggered by the prospect of tighter US monetary policy.

(Bloomberg) — Indonesia’s central bank tapped tools other than interest rates to help the rupiah weather an emerging-market selloff triggered by the prospect of tighter US monetary policy.

Bank Indonesia Thursday kept the benchmark seven-day reverse repurchase rate at a four-year high of 5.75%. While the decision was widely expected, Governor Perry Warjiyo announced a new tool to attract foreign funds to support the local currency.

The decision came as data compiled by Bloomberg showed investors sold $127 million worth of Indonesian bonds so far this August. The rupiah held its earlier 0.3% gain against the greenback to trade at 15,245 per dollar after the announcement.

The policy focus is oriented toward strengthening rupiah stability to mitigate the contagion effect of global financial market uncertainty, Warjiyo told reporters at the policy briefing.

Warjiyo had previously maintained that the central bank can sufficiently anchor the rupiah through its “Operation Twist” bond market interventions, propping up short-term yields to lure inflows. With funds outflows this month showing that the strategy wasn’t entirely paying off, the BI announced issuing ‘Bank Indonesia Rupiah Securities’ to attract foreign portfolio investment. 

The securities, with tenors of 6-, 9- and 12-months, are the latest example of the central bank employing unconventional policy tools instead of relying too much on rates, which if tightened too much could be detrimental to the economy.

“BI clearly remains reluctant to adjust the policy rate either way despite the pressures on the currency, opting instead to introduce a new instrument to attract capital inflows rather than hiking,” said Brian Tan, an economist at Barclays Bank Plc.

The greenback has been strengthening against emerging-market currencies this month amid indications the Fed could keep rates higher for longer as the US looks likely to avoid a recession. The rupiah has weakened over 1% so far this August, though it has clawed back some gains in the last three days.

Adding to the currency pressure is a global commodity slump that’s fast eroding Indonesia’s trade surplus. The current account swung back to a $1.9-billion deficit in the second quarter. Foreign reserves remain adequate, though the take-up of a Bank Indonesia facility to attract dollar export earnings remains tepid.

While the specter of rate hikes has reappeared among analysts, Bank Indonesia remains wary of tightening further due to fears economic growth could slow in the second half of 2023. Bank lending, retail sales and consumer confidence are softening. Inflation has also long returned to the central bank’s 2%-4% target, with the BI expecting consumer price gains to average 2.9% this year.

Warjiyo Thursday said that the global outlook remains uncertain, with a weaker recovery in China seen influencing the world economy. Still, BI retained its 4.5%-5.3% growth view for Indonesia’s economy in 2023.

Credit demand grew 8.54% in July, Warjiyo said, adding that the BI expects loan requirement increasing in line with the domestic economy’s strong performance. The bank earlier announced allowing banks to, starting October, cut their reserve requirement ratio by nearly half when they lend to priority sectors. 

–With assistance from Norman Harsono, Eko Listiyorini, Matthew Burgess and Tomoko Sato.

(Updates with details throughout.)

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