Indonesia's Rupiah under Pressure Ahead of BI Rate Announcement
Today, Bank Indonesia will start its February two-day policy meeting. Markets are eagerly awaiting whether the central bank of Indonesia will indeed cut its key interest rate (BI rate) again. Last month, it had cut the BI rate by 0.25 percent to 7.25 percent as inflation, the current account deficit and the rupiah rate were all under control. Although the rate cut was welcomed by the business community it was considered not enough to push borrowing costs lower in Southeast Asia's largest economy hence unable to boost economic activity significantly.
The majority of economists expect Bank Indonesia to cut its BI rate by 25 basis points again to 7.0 percent tomorrow (18/02). The rate decision is expected to be announced around 17:00 pm local Jakarta time. As a result, the Indonesian rupiah is under pressure today. A rate cut usually causes some short-term turmoil in the financial markets. Based on the Bloomberg Dollar Index, the rupiah had depreciated 0.78 percent to IDR 13,450 per US dollar by 11:05 am local Jakarta time. Besides speculation about another interest rate cut, the rupiah is also weakening due to China's weakening of the yuan (the yuan's daily fixing weakened the most in more than a month). Similarly, other emerging market currencies are showing weakness today.
Indonesia's annualized inflation rate stood at 4.14 percent (y/y) in January, higher than the 3.35 percent (y/y) rate in the preceding month but still comfortably within the central bank's target range. As indicators showed that Indonesia experienced deflation in the first week of February, the rising inflation pace that we saw in the first month of the year seems not to continue into the second month. As such, Bank Indonesia does not need to be overly concerned about inflation when discussing the February 2016 BI rate.
Recent data from Bank Indonesia show that the nation's current account deficit has eased in the fourth quarter of 2015 compared to the same quarter one year earlier. In Q4-2015 Indonesia's current account deficit stood at 2.39 percent of GDP, improving from 2.70 percent of GDP in the same quarter in 2014. Regarding full-year 2015, the current account deficit eased to 2.06 percent of GDP, still rather high but the nation's healthiest current account balance since 2011 (when it was still in surplus).
Bank Indonesia's benchmark rupiah rate (Jakarta Interbank Spot Dollar Rate, abbreviated JISDOR) depreciated 1.28 percent to IDR 13,504 per US dollar on Wednesday (17/02) on expectation of another rate cut. However, the currency is one of the best-performing emerging market currencies so far in 2016. If we go back a little further we saw the rupiah touching a recent low of IDR 14,728 per US dollar on 29 September 2015. Optimism about accelerating macroeconomic growth, backed by government spending, is one of the key factors that has caused the strengthening rupiah.
Indonesian Rupiah versus US Dollar (JISDOR):
| Source: Bank IndonesiaBahas
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Hi, thanks for your insight.Just wondering, when you mentioned of indicators which pointed towards a deflation in the first week of February, may I ask of which indicators are you referring to? Thanks.
Hi, thanks for your insight.Just wondering, when you mentioned of indicators which pointed towards a deflation in the first week of February, may I ask of which indicators are you referring to? Thanks.