Indonesia's Central Bank Signals Rate Hike to Stem Market Rout

(Bloomberg) -- Bank Indonesia is preparing monetary measures to restore stability to the nation’s currency and bond market hit by a selloff, signaling for the second time in less than two weeks that the central bank may hike rates.

“Bank Indonesia is in the middle of preparing firm monetary policy measures, including through the adjustment of 7-day reverse repo rate, prioritizing stabilization, to ensure market confidence and macroeconomic stability are maintained," Governor Agus Martowardojo said in a text message on Wednesday.

Indonesia’s currency, bonds and stocks are under the grip of a selloff as foreign investors exit riskier emerging markets amid a rising U.S. dollar and Treasury yields. The market rout has stoked speculation the Bank Indonesia may increase rates as early as next week when the bank’s board meets to review the monetary policy. The central bank last raised rates in November 2014.

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Martowardojo, who has repeatedly called for calm, said the central bank will continue to intervene in the forex market to protect the rupiah and take steps to ensure ample liquidity in forex and bond markets.

Indonesia's Central Bank Signals Rate Hike to Stem Market Rout

The rupiah is the worst performer in Asia after India’s rupee in the past three months, and slumped to 14,088 to a dollar in Jakarta on Wednesday, the weakest since December 2015. While the selloff in bonds has sent the yield on benchmark 10-year sovereign notes 104 basis points higher this year, the Jakarta Composite Index of stocks slumped to its lowest level since June on Wednesday, before rebounding 2.3 percent.

The central bank has drained the forex reserves by $7.1 billion in three months, partly to defend the rupiah, official data released on Tuesday show. The country’s cache of reserves fell $1.1 billion in April to $124.9 billion, still enough to finance 7.4 months of imports and servicing of government’s external debt, Bank Indonesia said.

“Bank Indonesia continues to implement stabilization efforts, including measured intervention in the forex market and stabilizing bond market by optimizing various forex and rupiah instruments for monetary operations and holding forex swap auctions,” Martowardojo said.

The central bank remains confident that the country will overcome the current market turbulence and maintain stable economic growth, Martowardojo said.

Foreign investors have dumped about $2.5 billion of stocks and bonds since the start of April, data compiled by Bloomberg show. Foreign investors own almost 40 percent of Indonesia’s government bonds, among the highest of Asian emerging markets, making the country vulnerable to a slump in sentiment and sharp outflows.

©2018 Bloomberg L.P.