What Is the Impact of the Federal Reserve's Latest Rate Hike on Indonesia?
As was widely expected by markets, the Federal Reserve raised its key interest rate to the range of 1.50 - 1.75 percent, which is the highest level since 2008, at the March 2018 monthly policy meeting on Wednesday (21/03). The rate hike was already priced in as few expected a different decision, hence most Southeast Asian stock indexes are up on Thursday (22/03), including Indonesia's benchmark Jakarta Composite Index that rose 0.19 percent to 6,324.78 points in the first trading session.
The Federal Reserve, now under the leadership of Jerome Powell, also indicated that US economic growth continues to strengthen and therefore it raised its forecast for US GDP growth to 2.7 percent (y/y) in 2018 and 2.4 percent (y/y) in 2019, a much higher projection compared to the projection that was made before US tax cuts were finalized.
A major source for calmness in financial markets on Thursday stemmed from the Federal Reserve's not so hawkish statements as it expects to raise interest rates twice more in 2018. However, the Federal Reserve also signaled that it may become more aggressive in terms of future rate hikes. In fact, it expects to raise interest rates three times in 2019, which is an increase from the two hikes in 2019 that was forecast in December.
It is also interesting to note that Powell said the US tax cuts will unlikely push US GDP growth to 3 percent (y/y) as desired by US President Donald Trump, while Powell also detects growing concerns about the negative consequences for the US economy in case a trade war breaks out.
Meanwhile, US inflation expectations remain benign (basically unchanged from the earlier projection). The projection for 2018 inflation remains at 1.9 percent (y/y) for both core and headline inflation. Slightly contradictory, US unemployment, which is currently at 4.1 percent, is expected to ease to 3.8 percent before the end of 2018, down from the 3.9 percent forecast in December.
The Indonesian rupiah had appreciated 0.14 percent to IDR 13,742 per US dollar by 13:50 pm local Jakarta time (Bloomberg Dollar Index), this is in line with the general trend as the US dollar is on the defensive after the Federal Reserve turned out to be less hawkish than anticipated. However, persistent concerns about a looming trade war between China and the USA keeps gains in Asian shares in check.
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