BI raises interest rate for the first time since 2011
The Bank of Indonesia unexpectedly raised the interest rate for the first time since 2011. BI aims to curb capital outflow when expectations on the Federal Reserve (Fed) tapering increased and cope with recent rising inflation.Source: Bloomberg Click the image to enlarge
The central bank also raised its deposit rate to avoid capital outflow in a best effort base before the benchmark interest rate was raised. Fasbi rose to 4.25% from an earlier 4%.
The Bank of Indonesia’s move is very different from other central banks in the world, as liquidity issues outpace exports in the current scenario when the Fed starts tapering its Quantitative Easing (QE). Most central banks are lowering their interest rate for a weaker exchange rate to gain more competitiveness in the exports market.
However, based on previous experiences in some developed markets, monetary policy effectiveness also has limited function in a limited period. In order to avoid outflow fundamentally, the government needs to excise economic reform.
Whether the government will decide to restrict subsidized fuel consumption, increase fuel price or even do nothing remains unknown. Local officials need to realize that limiting fuel benefit of subsidized fuel restriction aims to save the government’s budget, relying on infrastructure and local investments to spur growth or increase social welfare.
Bond yield also rallied after the central bank raised both the benchmark rate and Fasbi rate. The 2-year notes climbed to 5.972% from 4.723% in the beginning of the month.Source: Bloomberg, FXPRIMUS Click the image to enlarge
Fundamentally speaking, the Rupiah will be under pressure as:
- Investors need to know more about its fuel subsidies plan, as it directly shows determination on reform.
- The Fed’s QE largely benefited the Jakarta financial system. In the three tranches of the Fed’s QE, Jakarta Composite Index rallied more than 270%. It is the same theory as the “Aussie & Kiwi bearish view” I mentioned in my latest weekly report on 10 June. The financial system might also suffer from the outflow from QE tapering.
- The Dollar demand remains solid although there is some retracement recently. I still view it as a technical retracement.
Based on technical analysis, the USDIDR remains well in the ascending channel since September 2011. The resistance may be capped below 10193.04 (38.2% Fibo from 200 high to 2011 low).Source: Bloomberg Click the image to enlarge
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