New Bank Indonesia Governor Perry Warjiyo set the stage for a second interest rate increase in two weeks at an early policy meeting called for tomorrow, as he wastes little time in acting against a currency rout.
A day after Warjiyo was on Thursday last week sworn into office, the Indonesian central bank announced that its monetary policy board would meet this week, about a month before its next regular monthly scheduled meeting.
Warjiyo has pledged to act early and be ahead of the curve when it comes to policy, a stance he reiterated yesterday.
He told reporters in Jakarta that the out-of-cycle meeting is a pre-emptive step ahead of the US Federal Reserve’s next policy decision on June 14.
That would give the bank the chance to adjust policy before the Fed’s expected tightening move.
The bank is stepping up its action to stem a global rout triggered by rising US interest rates and a stronger dollar.
Macro-prudential policy will be eased to support economic growth, Warjiyo said yesterday after a joint meeting with Indonesian Minister of Finance Sri Mulyani Indrawati, Coordinating Minister for Economic Affairs Darmin Nasution and Indonesian Financial Services Authority Chairman Wimboh Santoso.
If experience is anything to go by, a rate hike is on the cards.
“Looking at the global trend, particularly the possibility of further increases in the US interest rate, I think Bank Indonesia will certainly increase its key rate,” said Andry Asmoro, an economist at PT Bank Mandiri in Jakarta.
“We still maintain our forecast that Bank Indonesia will increase its rate twice this year and once next year,” Asmoro said.
Global funds have offloaded a net US$2.1 billion of Indonesian sovereign bonds since the end of March and disinvested US$1.2 billion from Indonesian shares, pushing the rupiah to a fresh low of 14,213 against the US dollar last week.
The bank has tried to quell the investor exodus by intervening in the currency and bond markets, spending 50 trillion rupiah to buy sovereign bonds from the secondary market and announcing foreign-exchange swap auctions to ensure adequate liquidity.
Warjiyo “has made comments quite recently about being proactive with regard to using interest rates as a tool to stabilize the currency, so yes, I would agree the risk of seeing another interest rate hike pretty soon is fairly high,” Goldman Sachs Group Inc chief Asia-Pacific economist Andrew Tilton said in an interview on Bloomberg Television yesterday.
In 2013, when the rupiah came under severe selling pressure during the so-called “taper tantrum,” the bank responded with aggressive action, raising interest rates by 175 basis points in just five months.
Inflation is better controlled at 3.4 percent, well within the target band of 2.5 percent to 4.5 percent. Reserves are also in a stronger position at about US$125 billion, even though the central bank has drawn more than US$7 billion since the end of January.
A rate increase could help the central bank address the perception in some quarters that it is behind the curve, PT Bank Central Asia chief economist David Sumual said.
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