Central bank on alert over rupiah drop
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Bank Indonesia (BI) must take bold measures to halt the decline in the rupiah and regain investor confidence in the economy.
Analysts are hoping that the central bank’s decision to increase the deposit rate might only be the beginning of a series of monetary tightening measures.
BI increased its overnight deposit facility rate (Fasbi) – the interest rate paid to local lenders for short-term deposits at the central bank – by 25 basis points to 4.25 per cent from Wednesday, having kept it unchanged since last August.
“The rise is a pre-emptive measure from Bank Indonesia to give a signal to the market that we are ready to respond whenever new developments kick in,” Governor BI Agus Martowardojo said.
Agus explained that BI increased the Fasbi rate to absorb excess liquidity in the market. Less liquidity would eventually lead to more anchored inflation expectations and firmer support for the rupiah.
Agus only took up his position a few weeks ago and yesterday was the first time he has taken the chair at BI’s monthly board of governors meeting.
This meeting is thought to be crucial as recent capital outflow has put great pressure on the rupiah.
“Further turbulence cannot be ruled out,” Citi Research economist Helmi Arman wrote in a research note on Wednesday. “We think the tightening is long overdue to curb domestic demand in the face of the underperformance of exports.”
The recent rise in the Fasbi signalled tighter monetary policy down the road, Helmi noted, predicting another 50 basis points increase in Fasbi sometime in the next two months. The rupiah weakened yesterday a further 0.3 per cent to touch 9,856, according to the Jakarta Interbank Spot Dollar Rate (JISDOR).
