Indonesia favours rupiah stability above growth in rate move

Bloomberg

Indonesia’s central bank is showing its willingness to sacrifice economic growth for currency stability in its latest aggressive move on interest rates. Bank Indonesia surprised economists with a bigger-than-forecast 50 basis-point hike, 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’s 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 dollar this year.
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 policy makers as they try to stabilize the currency while providing enough support to the economy as President Joko Widodo seeks a second term in office in an election next year.
“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 Ltd. in Singapore, said after the decision.
But 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 BI has shown that they are willing to sacrifice some near-term growth for rupiah stability.
The rupiah gained as much as 0.6 percent against the dollar after the rate decision and was down 0.4 percent to 14,390 in Jakarta on Monday. The benchmark Jakarta Composite Index gained 0.12 percent after rallying 2.3 percent.
Bank Indonesia Governor Perry Warjiyo again pledged a monetary policy stance that’s pre-emptive, front-loading, and ahead of the curve. 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.