More policy tightening could be in store for Indonesia to buoy rupiah

Bloomberg

Indonesia’s second interest-rate increase in two weeks may be followed by more policy tightening to stem a slide in the rupiah amid an ongoing rout in emerging markets.
While the rupiah strengthened for a fifth day, the central bank isn’t in the clear yet. Much will depend on geopolitical events — from snap elections in Italy to ongoing trade disputes between the US and China — and how much further the US Federal Reserve will tighten monetary policy. Those have added to market jitters after a rout in emerging markets pushed the rupiah to its weakest level since 2015 last week.
“We don’t want to declare being out of the woods quickly,” said Vishnu Varathan, head of economics and macro strategy at Mizuho Bank Ltd. in Singapore. “Watch this space. We can’t take our eyes off the wobbles in the markets right now.”
The rupiah rose to the highest in a month after holding gains below the 14,000 level following the rate announcement. The currency has pared its decline this year to 2.4 percent against the dollar.
After less than a week in the job, Governor Perry Warjiyo followed through with a pledge to be “pre-emptive” and use monetary policy to stabilise the exchange rate by raising the benchmark rate by 25 basis points to 4.75 percent.
The move came at a special policy meeting held a month before its regular scheduled one, allowing the central bank to hike before the Fed’s expected tightening in June.
Warjiyo also flagged the possibility of further rate increases, depending on how domestic and global developments play out and how aggressive the Fed is in tightening policy. The central bank is open to hold additional monetary policy meetings if the situation demands, Deputy Governor Dody Budi Waluyo said.
“With the Federal Reserve still signaling tightening ahead, and Indonesia’s current account deficit still widening, another rate hike is in the pipeline before August,” said Tamara Henderson, Bloomberg Economics.
Indonesia has been one of the hardest hit emerging markets in Asia because of its reliance on foreign inflows to finance its current-account deficit. Foreign ownership of government bonds is also relatively high at about 38 percent, making the economy vulnerable to sharp swings in global sentiment.
The currency “is the biggest concern among foreign investors,” said Evan Lie Hadiwidjaja, head of research at PT Sinarmas Sekuritas.
“Currency stability has to come first, especially given the uncertainties and volatilities in the global market.”