May 30, 2018 / 7:49 AM / 6 months ago

Indonesia escalates fight to aid rupiah, flags chance of more rate hikes

JAKARTA (Reuters) - Indonesia’s central bank raised its benchmark interest rate for the second time in two weeks on Wednesday and flagged more possible hikes as it escalated a battle to boost the fragile rupiah and contain capital outflows.

Bank Indonesia's new governor, Perry Warjiyo, speaks at a media briefing at Bank Indonesia headquarters in Jakarta, Indonesia, May 30, 2018. REUTERS/Willy Kurniawan

Bank Indonesia’s new governor, Perry Warjiyo, pledged more action to promote financial and economic stability to bolster Indonesian assets amid an emerging market sell-off.

The central bank “will continue to calibrate global and domestic market developments to utilize room for further rate hikes in a measured way,” Warjiyo told reporters after the board of governors, at a special meeting, lifted the key rate IDCBRR=ECI by 25 basis points to 4.75 percent.

On May 25, one day after being sworn-in for a five-year term, Warjiyo called Wednesday’s off-cycle meeting. On May 17, BI raised its key rate by 25 basis points to shore up the rupiah, then trading at its weakest since October 2015.

Warjiyo, who was not always reading verbatim from the policy statement, called Wednesday’s hike “pre-emptive, front-loading and an ahead of the curve step” in response to expectations of higher U.S. interest rates.

Rahul Bajoria, an economist in Singapore for Barclays, said the two hikes in two weeks “very forcefully signals to the market that the new governor is very serious about maintaining financial stability.”

‘CURRENCY FIRST’

Stephen Innes, head of Asia-Pacific currency trading at OANDA, said Wednesday’s decision signalled “currency first and nothing else really matters”.

In 2016 and 2017, BI cut its benchmark rate by a total of 200 bps in a bid to boost sluggish lending and economic growth.

Warjiyo said the hikes should not immediately impact economic growth as the central bank would compensate with looser “macroprudential” rules. These would be discussed at BI’s meeting in late June, though previously Warjiyo has said they could included easing housing mortgages rules.

By the end of 2018, BI expects lending growth to hit 12 percent, after languishing in the single-digits in the past few years. April’s annual growth rate was 8.9 percent.

With lending and consumption weak, Indonesia’s annual economic growth has been stuck at about 5 percent.

On Monday, Finance Minister Sri Mulyani Indrawati said the government was prepared to use short-term measures to support the economy even if that meant slightly lower growth.

The government has a 2018 growth target of 5.4 percent. BI said on Wednesday it still expects expansion of 5.2 percent, better than last year’s 5.07 percent.

Despite the hawkish tone in BI’s statement, economists are divided over the pace and extent of further tightening.

“We expect further hikes later this year, but we doubt that a repeat of the aggressive tightening cycle seen in 2013 is on the cards,” Capital Economics said in a note, citing Indonesia’s better fundamentals compared to when it was dubbed one of the “Fragile Five”.

In 2013, during the so-called “taper tantrum”, BI raised rates by 175 basis points.

SOUND KEY INDICATORS

The rupiah, one of the worst performers among Asian currencies this year, barely moved on Wednesday’s rate news and closed at 13,985 per dollar.

The currency has gained slightly since hitting the lowest in more than two years last week, partly due to foreign buying of bonds.

Ten-year government bond yields ID10YT=RR were quoted at 7.12 percent on Wednesday, down 50 basis points in a week.

According to finance ministry data, foreign holding of tradable bonds increased by 1.48 trillion rupiah ($105.83 million) from Thursday, the day Warjiyo took office, to Monday, though analysts also pointed to rupiah stability and a slide in oil prices as supporting buying.

Slideshow (2 Images)

Stressing Indonesia’s sound fundamentals, Warjiyo said the inflation rate is seen at 3.6 percent at the end of 2018, while the current account deficit is expected to be below 2.5 percent of GDP.

Harry Su, managing director at financial research firm Samuel International, said BI “is now doing more proactive and forward-looking policy, particularly with regard to a possible higher current account deficit, as well as inflationary pressure stemming from the current higher oil price environment.”

All but one of 18 analysts in a Reuters Poll expected BI to raise the key rate on Wednesday.

Additional reporting by Gayatri Suroyo, Fransiska Nangoy and Tabita Diela in JAKARTA and Karen Lema in MANILA; Editing by Richard Borsuk and Ed Davies

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