Odds of Indonesia Rate Hike Increase as Currency Tumbles

(Bloomberg) -- With Indonesia’s central bank failing to stem the slide in the currency to a two-year low, bets of a rate hike are increasing, triggering a selloff in the nation’s stocks and bonds.

PT Bank Mandiri expects the central bank to increase rates as early as this quarter to curb an exodus of investors from the country’s stocks and bonds, while PT Bank Central Asia says it will be difficult to go against the global trend of tightening monetary policy.

Indonesia’s rupiah tumbled to a 27-month low against the dollar on Wednesday despite the central bank intervening in the market since early February to ease heightened volatility. That’s raised concern that Bank Indonesia may be trying in vain to defend the currency as emerging markets face pressure from a surging U.S. dollar.

“The Federal Reserve may accelerate its plan to increase its rate because economic data is good in the U.S. and inflation is picking up there,” said Bank Mandiri President Director Kartika Wirjoatmodjo. “If Indonesia doesn’t respond, we will be seen as lagging behind. That will trigger a selloff in bonds and equities.”

Worst Performers

The Indonesian currency along with the Philippine peso and Indian rupee are among the underperformers among developing economies globally this year. With U.S. 10-year Treasury yields breaching 3 percent on Tuesday, the rupiah faced renewed selling pressure.

The rupiah fell as much as 0.3 percent to 13,925 against the dollar, the lowest since January 2016. That stretched losses to 2.5 percent this year. The benchmark Jakarta Composite Index retreated 2.5 percent to close at its lowest level since December as rate hike concerns fueled losses among banks. The yield on the benchmark 10-year bond surged 22 basis points, the most in almost seven months, to 7.17 percent.

Click to read about banking stocks falling

Bank Indonesia signaled a more hawkish tone last week when it left rates unchanged. While inflation has been subdued and the current-account deficit remains well within its target, the currency may play a bigger role in future policy decisions. It last moved in September when it cut rates to support growth.

The losses for rupiah would have been greater had Bank Indonesia not made a "sizable" intervention in the currency and bond markets, according to Governor Agus Martowardojo, who pledged to take more action.

Click to read Bank Indonesia intervening in markets

The central bank may raise interest rates earlier than forecast because of tightening monetary policy elsewhere in the world and the rupiah volatility, according to Enrico Tanuwidjaja, an economist at United Overseas Bank Ltd. in Jakarta, who had penciled an increase in the fourth quarter.

But there are others who see another rate cut should the rupiah stabilize.

"Provided we see the currency stabilize, which we think is probably quite likely, then I wouldn’t rule out another cut,” said Gareth Leather, senior Asia economist with Capital Economics Ltd. in London.

Bank Indonesia is fighting a broad-based depreciation in currencies as global interest rates are on an upward trend, said Jahja Setiaatmadja, president director of Bank Central Asia.

“Sometimes, it’s difficult to challenge the current unless Bank Indonesia wants to keep intervening with the risk of declining foreign reserves,” Setiaatmadja said. “It’s a difficult decision, but that’s the market.”

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