Bank Indonesia is showing its willingness to sacrifice economic growth for currency stability in its latest aggressive move on interest rates.
The Indonesian central bank surprised economists with a bigger-than-forecast 50 basis-point hike on Friday, on top of two rate increases in May aimed at halting a currency rout. That takes the benchmark rate to 5.25 percent, with analysts betting there is more tightening to come.
Southeast Asia’s biggest economy has been among the hardest hit in the region following a sell-off in global emerging markets triggered by rising US interest rates. The rupiah has slumped more than 5.7 percent against the US dollar this year.
Photo: Reuters
Before the market turmoil, Bank Indonesia had been cutting interest rates to spur spending, lowering the key rate eight times since 2016, but with little success in boosting economic growth much higher than 5 percent.
That underscores the challenge for policymakers as they try to stabilize the currency while providing enough support to the economy as Indonesian President Joko Widodo seeks a second term in office in an election next year.
MORE RATE HIKES?
“There should be no doubt in the market’s mind about the determination of the new governor to hike further if needed to defend the rupiah,” Khoon Goh, head of Asia research at Australia & New Zealand Banking Group in Singapore, said on Friday after the decision.
However, there is a cost that comes with the aggressive tightening, Goh said, adding whether the 50 basis points move is enough will still depend on the broader environment, but Bank Indonesia has shown that it is willing to sacrifice some near-term growth for rupiah stability.
Bank Indonesia Governor Perry Warjiyo on Friday pledged a monetary policy stance that is pre-emptive, front-loading and ahead of the curve.
EASING MEASURES
To mitigate the risk to the broader economy, the central bank also eased some macro-
prudential measures, such as relaxing limits on loan-to-value ratios for property to allow banks to boost lending on home loans.
Indonesian Minister of Finance Sri Mulyani Indrawati has said the government is willing to accept slower economic growth as a trade-off for stability.
While the economy has been growing at about 5 percent, that is well below historical levels and lower than the 7 percent Widodo had targeted when he took office.
Inflation is also low by Indonesian standards, with consumer prices rising 3.1 percent last month, the slowest pace of growth since December 2016.
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