Bank Indonesia Also Expects US Interest Rate Hike in March 2017
The central bank of Indonesia (Bank Indonesia) is also among the many institutions or market participants that expect the Federal Reserve to raise its Fed Funds Rate by 25 basis points at the coming Federal Open Market Committee (FOMC) meeting (14-15 March 2017). This move should put some temporary pressure on the Indonesian rupiah (as Indonesia will most likely see capital outflows) and therefore Bank Indonesia sees few to none room for additional monetary easing in Southeast Asia's largest economy in the remainder of this year.
Throughout 2016 Bank Indonesia cut its benchmark interest rate six times (and also changed its benchmark from the BI Rate to the BI 7-day Reverse Repo Rate) in an effort to boost economic growth. This was possible because Indonesia's inflation had eased considerably, while the rupiah performance was stable and the current account deficit under control.
However, Bank Indonesia Governor Agus Martowardojo expects a strong US dollar around the days of the looming Fed Funds Rate hike. Moreover, in the remainder of the year the Federal Reserve may raise its benchmark interest rate twice more. Therefore, Indonesia - despite having strong macroeconomic fundamentals - is likely to experience capital outflows. The good news is that these capital outflows are expected to be temporary only.
As such, the situation is different from the taper tantrum in 2013 when Indonesia saw its rupiah depreciate over 25 percent against the US dollar. Back then investors were concerned about Indonesia's high inflation (a side-effect of the government's fuel subsidy cuts), its record current account deficit, slowing economic growth and political uncertainties ahead of Indonesia's 2014 presidential election. Also Indonesia foreign exchange reserves (USD $119.9 billion at end-February 2017) are considerably higher now compared to four years ago. Bank Indonesia tends to use ("burn") these reserves to support the rupiah exchange rate (guard it from too much volatility).
Although Indonesia organized regional elections in February and the battle for Jakarta's gubernatorial seat is close, these elections did not impact on the rupiah rate. What does influence the rupiah is (uncertainty) about the economic and political policies of US President Donald Trump.
Indonesian Chief Economics Minister Darmin Nasution said the possible Fed Funds Rate hike this month will only have a limited impact on Indonesia, perhaps up to one week, because the move is basically already priced in, while Indonesia's macroeconomic fundamentals are strong enough to cope with such developments.
Bets on a Fed Funds Rate hike in mid-March have risen to nearly 100 percent after The US economy added 235,000 jobs in February 2017, surpassing analysts' expectations, while US unemployment eased to 4.7 percent, compared with 4.8 percent in the preceding month.
Indonesian Rupiah versus US Dollar (JISDOR):
| Source: Bank IndonesiaBahas
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