Indonesia Hikes Key Interest Rate for 3rd Consecutive Time

The Bank Indonesia raised its benchmark 7-day reverse repo rate by 50 bps to 5.25 percent at its June meeting, while markets were expecting a smaller 25 bps hike. It was the third rate increase in six weeks in an attempt to stabilise the volatile rupiah, which has weakened this month despite the two rate hikes in May.
Bank Indonesia | Gabriela Costa | 6/29/2018 9:56:22 AM
The lending and the deposit facility rates were also raised by 50bps to 6.0 percent and 4.5 percent respectively.

Excerpts from the Bank Indonesia Press Release:

"The policy raise hike decision is Bank Indonesia’s pre-emptive, front-loading, and ahead of the curve move to maintain the domestic financial market’s competitiveness against several countries’ changing monetary policies as well as high global uncertainty. The policy is still backed by dual intervention policy in the foreign exchange market and government securities (SBN) market as well as the monetary operations strategy to maintain adequate liquidity, particularly in the rupiah money market and interbank swap market. Bank Indonesia is confident that the policy measures will effectively strengthen economic stability, specifically the Rupiah exchange rate stability. Moving forward, Bank Indonesia will continue to monitor the domestic and global economic developments and outlook, to strengthen future policy mix responses.

Rupiah exchange rates defied depreciatory pressures in June 2018, which intensified in the second half of the month as the USD strengthened globally. The rupiah appreciated until the middle of June 2018, hitting Rp13,853/USD on 6th June, in line with Bank Indonesia’s pre-emptive, front-loading and ahead-of-the-curve policy response taken at the end of May 2018. Nevertheless, the more aggressive change in stance adopted by the Federal Reserve at the Federal Open Market Committee (FOMC) meeting in the middle of June, combined with the changing central bank policy response in other countries, specifically in Europe and China, as well as global financial market uncertainty, triggered depreciation nearly all global currencies, including the Rupiah. On 28th June 2018, the rupiah stood at Rp14,390/USD, falling 3.44% (ptp) on the level recorded at the end of May 2018. Compared with conditions at the end of December 2017, the rupiah has fallen 5.72% (ytd), which is less severe than the depreciation experienced in other developing economies, such as The Philippines, India, South Africa, Brazil, and Turkey. Bank Indonesia will remain vigilant of the global financial market uncertainty, while continuing to stabilise the rupiah in line with the currency’s fundamental value and maintaining market mechanisms, backed by financial market deepening efforts.

Inflation (3.5±1 percent) and economic growth (5.1-5.5%) forecasts for 2018 were kept unchanged.

Indonesia Hikes Key Interest Rate for 3rd Consecutive Time