Indonesia Increases Interest Rate for Second Time in Two Weeks to Boost Flagging Rupiah

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ASEAN Regulatory Brief

By Dezan Shira & Associates

Bank Indonesia (BI), the country’s central bank recently raised its key interest rate for the second time within a span of just two weeks. The move is seen as an attempt to arrest the volatility of the Rupiah, the country’s currency as well as to prevent the outflow of capital from the archipelagic nation.

On May 30, 2018, BI increased its key benchmark by 25 basis points to 4.75%. This was a repeat of an earlier increase of 25 basis points announced on May 17, 2018. The previous increase was in itself the first interest rate hike in four years.

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The BI has indicated of further hikes in the coming months, and these are seen by observers to be in line with its intent to pursue a proactive monetary policy and contain frequent fluctuations in the exchange rate. The value of the Rupiah fell 4.8 percent vis-à-vis the US dollar since the beginning of the year. This has been attributed to a variety of factors, including a growing trade deficit, rising global oil prices, and anticipations of a further tightening of US monetary policy.

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BI’s latest move has seen some success with the Rupiah hitting its strongest level vis-à-vis the US dollar in four weeks on June 1, 2018. The Rupiah has been one of the worst hit among Asian currencies in 2018 and the country has seen investors withdrawing from Indonesian stock and bond markets.

Although analysts have warned that increasing the interest rate over short periods of time might have adverse effects on the country’s economy, the government has argued that a weaker Rupiah would cause more damage to the economy.

Perry Warjiyo, the new BI governor, has stated that one of his first priorities would be to restore investor confidence and attract more inward FDI to support the Rupiah.

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