Bank Indonesia's New Governor Stamps His Mark With Rate Hike

Indonesia’s new central bank chief raised interest rates at an early policy meeting on Wednesday, moving swiftly to counter an emerging-market selloff that’s shaken the nation’s currency and bonds.

Less than a week in office, Governor Perry Warjiyo led the board in increasing the seven-day reverse repurchase rate by 25 basis points to 4.75 percent, in line with almost all of the forecasts from 26 economists surveyed by Bloomberg.

Global emerging markets are in a tailspin as rising U.S. interest rates and a stronger dollar prompt investors to pull money out of riskier assets. From Argentina to Indonesia, central bankers are grappling with sliding currencies and capital outflows, pushing them to take more aggressive action to avoid full-blown crises.

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Since taking office on May 24, Warjiyo has pledged to be “pre-emptive” and use monetary policy to stabilize the exchange rate. The governor said on Wednesday the rate hike -- at an an out-of-cycle meeting that comes a month before the regular scheduled one -- was a bid to act before the Federal Reserve’s expected tightening in June and to help bolster the currency.

Bank Indonesia will continue to calibrate both domestic and global developments to take advantage of room for measurable increases in interest rates, Warjiyo said. The central bank will continue dual intervention to support the currency, he said.

Rupiah Slump

The rupiah is among the worst performers in Asia this year, dropping 5 percent against the dollar since the selloff began towards the end of January, while yields on 10-year government bonds have surged almost 100 basis points.

The currency was little changed at 13,993 against the dollar as of 2:35 p.m. in Jakarta on Wednesday.

“The 25 basis-point hike will be welcomed by investors as Bank Indonesia reiterates its mandate for rupiah stability,” said Eugene Leow, a fixed-income strategist at DBS Group Holdings Ltd. in Singapore. “Unfortunately, higher rates appear to be necessary as the global environment becomes less conducive for risk taking.”

The global emerging-market rout has hit countries like Turkey and Argentina the worst. Turkey raised interest rates by 300 basis points at an emergency meeting last week, while Argentina increased interest rates three times in the past month.

Foreign Exposure

In Asia, investors have punished those countries running current-account deficits -- Indonesia, India and the Philippines -- and that are more reliant on foreign inflows to fund their import needs. Overseas investors also hold a relatively high share of Indonesian government bonds at about 38 percent, making it more vulnerable to global selloffs.

The Philippine central bank increased its benchmark rate in May and said it’s prepared to take more action if needed, while economists have brought forward their calls for a rate hike in India.

Rate increases in Indonesia come amid a subdued inflation environment and sluggish economic growth. Consumer prices rose 3.4 percent in April from a year ago, comfortably within the central bank’s target for 2018 of 2.5 percent to 4.5 percent.

Warjiyo, who has pledged currency stability as well as growth, said there would be further easing of macro-prudential measures. Economists expect the central bank will make changes to loan-to-value ratio rules in a bid to boost lending.

— With assistance by Rieka Rahadiana, Viriya Singgih, and Michael J Munoz

(Updates with comments from governor, economist.) LISTEN TO ARTICLE 3:12 Share Share on Facebook Post to Twitter Send as an Email Print