What Analysts Say About Bank Indonesia's Rate Increase Surprise

(Bloomberg) -- Bank Indonesia’s decision to raise benchmark rates more than expected underscored its determination to stabilize the market, analysts said, though they remained cautious over the outlook given the global trade row and the Federal Reserve’s tightening stance.

The central bank lifted the seven-day reverse repurchase rate by 50 basis points to 5.25 percent on Friday, marking a third hike in six weeks. Of the 31 economists surveyed by Bloomberg, 24 predicted a 25 basis-point hike and the rest forecast no change.

The rupiah strengthened as much as 0.6 percent against the dollar immediately after the decision, and closed up 0.4 percent at 14,330. The benchmark Jakarta Composite Index jumped 2.3 percent. The nation’s 10-year bond yield dropped for the first day in seven, slipping 9 basis points to 7.81 percent.

‘Readiness to be Aggressive’

Joey Cuyegkeng, an economist at ING Groep NV in Manila:

  • A surprise 50 basis-point hike would help and would communicate to the market its readiness to be aggressive in stabilizing the markets and protecting the financial system
  • ING recently revised end-2018 rupiah forecast to to 14,320 per dollar from prior estimate of 13,890

‘Prove Futile’

Nick Twidale, Sydney-based chief operating officer at Rakuten Securities:

  • Repetitive rate hikes mainly to stem the depreciation of the currency will prove futile in the long run
  • The central bank should realize that rate hikes alone will not drive the currency. The more the central bank uses them as a weapon of choice against currency depreciation, the less impact they will have
  • It all comes back to the trade question that has been plaguing markets for the last couple of months. They have to move to a more reactionary mode and see how the trade game plays out
  • We’ll see further consolidation in a wide range. Next target topside for USD/IDR is the 2015 high of about 14,750

Not Much Option

Toru Nishihama, an emerging-market economist at Dai-ichi Life Research Institute in Tokyo:

  • It seems like there wasn’t much option but for the central bank to deliver the bigger-than-expected rate increase to support the rupiah. A 25-basis-point rate increase was already priced in, so they probably had to deliver more than that
  • Indonesia sees pressure on its current-account deficit especially as oil prices increase and fiscal conditions also face challenges. With sentiment for the whole emerging markets quite weak, nations like Indonesia are more vulnerable to a selloff
  • Despite the bigger-than-expected rate hike, the rupiah may again see further downward pressure, which would probably mean BI would have to boost the policy rate further. It’s possible to see the key rate to rise to 6 percent by year-end should the rupiah continue to weaken

Foreign Flows

Alan Richardson, an investment manager at Samsung Asset Management Co. in Hong Kong:

  • The 50 basis point rate hike should stabilize the currency, which is paramount for foreign capital inflows to return. This could help the stock market as foreign capital flight has likely peaked
  • Following this rate hike, real interest rates are now at 200 basis points, suggesting the central bank is now ahead of inflation and signals it is committed to stabilizing capital markets

‘Warjiyo’s seriousness’

Khoon Goh, head of Asia research at Australia & New Zealand Banking Group Ltd. in Singapore:

  • BI’s surprise 50 basis-point rate hike today underscores Governor Perry Warjiyo’s seriousness to get ahead of the curve and stem the depreciation pressure on the rupiah
  • There should be no doubt in the market’s mind about the determination of the new governor to hike further if needed to defend the rupiah
  • But there is a cost to such aggressive tightening on economic activity, which BI will attempt to offset via other tools such as relaxing loan-to-value ratios
  • In the current environment, there are no easy decisions for policymakers. Whether today’s move is enough will still depend on the broader environment, but BI has shown that they are willing to sacrifice some near-term growth for rupiah stability

External Factors

Ray Choy, head treasury strategist at CIMB Bank in Kuala Lumpur:

  • The increase in interest rates supports the rupiah which may strengthen to 14,200
  • Indonesia faces rising risks from the external sector, driven by the U.S. Federal Reserve’s signal to increase interest rates. Furthermore, trade tensions will very likely worsen Indonesia’s current-account balance
  • That said, Indonesia remains fundamentally robust while bond and currency valuations appear cheap, especially if Treasury yields continue the current trend of decline. Therefore, the core of the market volatility is driven more by external events rather than internal weaknesses

Ahead of the Curve

Evan Lie Hadiwidjaja, head of equity research at Sinarmas Sekuritas:

  • The market will be happy with the 50 basis-point hike as it shows a big commitment to rupiah stability and consistency toward being pre-emptive, front-loading, and ahead of the curve
  • On another note, BI continues to maintain a "pro-growth" stance through macro prudential policy: LTV relaxation. The two catalysts combined may boost consumer confidence as rupiah will stabilize while growth will still be maintained

Not the End

Saktiandi Supaat, head of foreign-exchange research at Malayan Banking Bhd. in Singapore:

  • Given the rising risk aversion -- and Treasury yields look set to continue for a while longer and weigh on the rupiah -- today’s increase, though more than expected, could possibly not mark the end for the need to continue the tightening cycle
  • The rate increase comes against a backdrop of continued weak economic growth and subdued inflation, and clearly indicates the main focus of the central bank is boosting the rupiah

To contact Bloomberg News staff for this story: Ruth Carson in Sydney at rliew6@bloomberg.net;Lilian Karunungan in Singapore at lkarunungan@bloomberg.net;Yumi Teso in Bangkok at yteso1@bloomberg.net;Livia Yap in Singapore at lyap14@bloomberg.net;Liau Y-Sing in Kuala Lumpur at yliau@bloomberg.net;Kintan Andanari in Singapore at kandanari@bloomberg.net

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With assistance from Editorial Board