Indonesia: Warjiyo signals at rate hikes ahead of the Fed’s increases

  • Indonesia must raise interest rates ahead of the US Federal Reserve to avoid “drastic” capital outflows, its central bank governor said on 3 Oct 18.
  • The comments appear to open the door for another Indonesian rate rise before mid-Dec 18, when the Fed is expected to increase US rates for the fourth time in 2018.
  • The governor said the Fed will probably hike one more time in 2018, then twice in 2019. The Fed, when last week making 2018’s third hike, said it sees a Dec 18 increase, three in 2019 and one in 2020.
  • Bank Indonesia (BI) has raised interest rates five times since mid-May 18 by a total of 150 basis points and intervened in the currency market to help the rupiah and reduce volatility.
  • The Indonesian rupiah plunged to a record low of IDR15,000/USD on 2 Oct 18, the lowest rate since the 1998 financial crisis, as a result of a combination of pressures such as the escalating US-China trade war and rising oil prices that may increase the country’s trade deficit.
  • the US has escalated sanctions on China by coaxing Mexico and Canada to join the imposition of trade restrictions on Chinese products via a new North American trade deal.
  • Meanwhile, global oil prices have risen significantly since Apr 18, straining the country’s already gaping USD1.52bn deficit recorded in May 18 – one of the highest among emerging economies.
  • Data from the Energy and Mineral Resources Ministry shows that Indonesia required 1.3 billion bpd of oil in 2017, out of which 59% was produced locally while the other 41% was imported.
  • The government’s most recent attempt to reduce oil imports was the requirement that all diesel sold within the country be 20% palm oil-based. The move, effective 1 Sep 18, is expected to reduce the country’s foreign exchange spending by USD5.6bn annually.
  • Warjiyo said the BI’s hikes, done in the absence of domestic price pressures, were intended to attract portfolio investment.
  • The CAD was 1.7% of GDP in 2017. BI has forecast the gap to rise to somewhere below 3% in 2018, then narrow to about 2.5% in 2019.

External Link: http://www.theedgemarkets.com/article/indonesia-cbank-gov-signals-need-hike-rates-ahead-fed-increases

External Link: https://www.straitstimes.com/asia/se-asia/indonesian-rupiah-falls-to-record-low-amid-rising-pressures

3-Oct-2018


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