Indonesia may resort to more interest rate hikes to prop up rupiah

SINGAPORE (ICIS)–Indonesia’s central bank has unexpectedly raised its key interest rate to stabilize its slumping currency – the rupiah (Rp) – against the strong US dollar, with further monetary tightening likely given high possibility of worsening global risks.

• Central bank move prompted by rupiah’s fall to lowest since 2020
• Strong US dollar sends global currencies tumbling
• 2024 GDP growth forecast at 4.7-5.5%

At 02:45 GMT, the rupiah was trading at Rp16,223 against the US dollar, easing from a four-year low of Rp16,316 hit on 17 April.

On 24 April, Bank Indonesia (BI) hiked its seven-day reverse repurchase rate by 25 basis points to its highest since 2016 at 6.25%, and also raised its overnight deposit and lending rates by a quarter point to 5.50% and 7.00%, respectively.

“Bank Indonesia continues orienting exchange rate policy towards maintaining rupiah stability against the impact of broad-based US dollar appreciation,” the central bank said in a statement.

RATE HIKES MAY CONTINUE AMID RUPIAH WEAKNESS
The rupiah, along with other currencies in Asia, has been tumbling against the US dollar, which is being supported by higher-for-longer interest-rate stance of the US Federal Reserve.

The US dollar is also generally considered a “safe haven” for investors in times of global economic distress.

From the start of the year to 23 April, the rupiah tumbled against the US dollar by 5.1%, according to Bank Indonesia, noting that the depreciation was less severe compared with the Thai baht’s 6.6% fall, the South Korean won’s 7.9% plunge and the Japanese yen’s 8.9% slump over the same period.

“The key message delivered by BI was that developments in the global economy have changed rapidly alongside heightened risks and uncertainties especially due to the shifting stance of the Fed’s rate policy and deteriorating geopolitical tensions in the Middle East,” Singapore-based UOB Global Economics & Markets Research said in a note.

BI has been intervening to stabilize the rupiah, which slumped to its lowest since 2020 around mid-April as the US Fed is unlikely to cut interest rates anytime soon while escalated tensions in the Middle East continue.

The Indonesian central bank’s April monetary policy decision, like in October last year, was in response to recent foreign exchange (FX) weakness amid worsening external conditions, it said. In October 2023, the central bank had issued an urgent 25bps interest rate hike.

It deemed the move a “pre-emptive and forward-looking step” to reduce the impact on imported inflation and ensure headline inflation remains within its 1.5-3.5% target.

In March, Indonesia’s inflation was higher than expected at 3.05%.

“We think today’s decision was a hawkish hike, and the rationale provided by BI underscores that its strong focus on FX stability remains in place,” Japan’s Nomura Global Markets Research said in a note.

“We believe if the external backdrop does not improve and IDR [Indonesian rupiah] pressures persist, this may not yet be the end of BI’s hiking cycle.”

GDP ON TRACK FOR SOLID GROWTH
Southeast Asia’s biggest economy remains resilient despite the build-up of global uncertainty, BI said in a statement, with average growth in the first two quarters of 2024 likely to exceed the 5.04% expansion in Q4 2023.

The central bank forecasts a 4.7-5.5% GDP growth in 2024, compared with the actual 5.04% expansion rate posted the previous year.

“Goods exports remain unfazed by declining commodity exports given lower international commodity prices and weak demand from Indonesia’s main trading partners, such as China,” it said.

Indonesia has been in trade surplus for the 47th consecutive month in March. The trade surplus for the month at $4.5 billion represents more than a fivefold increase from February’s $800 million.

On a month-on-month basis, March exports increased by 16.4%, the first monthly growth this year, supported by the acceleration of non-oil and gas (non-OG) exports, particularly in crude palm oil (CPO), coal, and steel commodities.

On a year-on-year basis, however, March exports were down 4.2% to $22.4 billion, but the rate of decline was narrower than February’s 9.6%; while imports fell by 12.8% to $18 billion.

Indonesia is one of the biggest net importers of petrochemicals in southeast Asia, fulfilling around half of its PE and PP requirements respectively through imports, according to the ICIS Supply and Demand Database.

Focus article by Nurluqman Suratman