Indonesia Steps Up Rupiah Support by Unexpectedly Restarting Rate Hike

Indonesia’s central bank will assess the state of global uncertainty in coming months to decide if further interest-rate hikes are needed to bolster the rupiah.

(Bloomberg) — Indonesia’s central bank will assess the state of global uncertainty in coming months to decide if further interest-rate hikes are needed to bolster the rupiah.

“The global dynamic is very fast. We need to review again from month to month. Our goal is the same: Price stability, financial system stability and payment system stability to support our economic growth,” Governor Perry Warjiyo said in an investor call on Thursday, when asked whether he saw the need for more tightening in the future.

Bank Indonesia increased its seven-day reverse repurchase rate by 25 basis points to a fresh four-year high of 6% on Thursday. The decision was predicted by just one of the 31 economists surveyed by Bloomberg, with all others expecting no change.

It’s the first rate hike since January, when policymakers said they had already done enough to guide inflation back to the 2%-4% target. While price gains are still under control, growing risks from a broader Middle East conflict nudged policymakers to action to support the local currency.

The global financial market uncertainty needs a stronger policy response to manage the spillovers, Warjiyo said at a briefing earlier on Thursday to announce the rate decision. Amid geopolitical tensions and higher-for-longer rates in the US, capital outflows are expected to persist through the fourth quarter, he said.

Expectations of economic growth remaining “solid” at the 4.5%-5.3% range allowed Warjiyo and his colleagues to turn their focus back toward keeping price pressures at bay. 

“This increase is to strengthen rupiah exchange rate stabilization policies amid the impact of high global uncertainty and is a preemptive and forward looking step to mitigate impact on imported inflation,” Warjiyo said. At the same time, the central bank kept lending rules loose to support domestic consumption.

The rupiah pared an earlier loss to close 0.5% weaker at 15,815 per dollar after the unexpected decision. Five-year yields gained 14 basis points to 6.82%, while the benchmark stock index declined 1.2%.

The currency has slumped more than 2% against the greenback this month, touching its weakest since April 2020 earlier Thursday as traders shun emerging assets following the Federal Reserve’s hawkish rhetoric.

“Bank Indonesia had to hike rates today as it had very little firepower to defend otherwise,” said Vijay Kannan, a macro strategist at Societe Generale SA in Singapore. “This surprise rate hike is largely aimed at FX stabilization — which clearly means we are back to higher sensitivity to Fed policy, unlike the earlier part of the year when trade surpluses were sufficient to ward off the need to import higher global rates environment.”

Currency Defenses

The rate hike marks a sharp turnaround for Warjiyo, who had only on Oct. 6 seen rates on hold for a while in light of the strong dollar. Those comments were made before fighting erupted between Israel and Hamas on Oct. 7, and shows how abruptly the calculus has changed for monetary authorities.

The global environment is getting even more uncertain and volatile, Warjiyo conceded. He sees a risk the Fed may still hike further in its December meeting. Oil and food prices are also on the rise, slowing the deceleration of global inflation. Interest rates are shooting up globally, both for shorter and longer tenors, he said.

What Bloomberg Economics Says…

“The rupiah is still in the driver’s seat for Indonesia’s monetary policy — and if sentiment continues to deteriorate at a rapid pace, another rate hike can’t be ruled out.”

— Tamara Mast Henderson, economist

For the full note, click here

To further build up the rupiah’s defenses, Bank Indonesia will begin issuing FX-denominated securities and sukuk on Nov. 17 to capture more foreign inflows. That will complement the rupiah notes it debuted in September, which holds an outstanding 113.7 trillion rupiah ($7.2 billion) to date — roughly 10 trillion rupiah of which is held by non-residents. Derivatives, including interest rate swaps, may be next.

The central bank also pledged to continue with its so-called triple intervention in the spot, domestic non-deliverable forward and bond markets. Those interventions dragged FX reserves to a 10-month low in September, even before the renewed round of rupiah weakness this month. Shrinking exports and a current account in deficit are crimping Indonesia’s dollar supplies further.

“Today’s move will likely provide some relief for the rupiah by taking the still-narrow interest rate differential to 50 basis points over the Fed. We believe that Bank Indonesia will remain open to further tightening should the Fed carry out a hike of its own, with rupiah stability set to remain a likely decision point for the rest of the year,” said Nicholas Mapa, a senior economist at ING Groep NV.

–With assistance from Norman Harsono, Eko Listiyorini, Tomoko Sato, Matthew Burgess, David Finnerty and Marcus Wong.

(Recasts top with comments from Warjiyo on policy outlook)

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