Raising Benchmark Rate Will Be Solution

The surge in the rupiah exchange rate against the US dollar may result in the increase of inflation. It is necessary, therefore, that BI increase the benchmark interest rate to maintain the stability of the domestic economic climate.

KOMPAS/PRIYOMBODO

A trader watches the ticker tape of the Jakarta Composite Index (JKSE) on Thursday (26/4/2018) at the Indonesia Stock Exchange in Jakarta. The JKSE closed down 2.81% on Thursday, or down 170.65 points to 5,909.19.

JAKARTA, KOMPAS — The surge in the rupiah exchange rate against the United States dollar may result in the increase of inflation. It is necessary, therefore, that Bank Indonesia (BI) increase the benchmark interest rate to maintain the stability of the domestic economic climate.

Last week, the rise in the US dollar exchange rate against the majority of the world\'s currencies continued. The strengthening of the US dollar also affected the Jakarta Composite Index (JCI), which dropped to the 6,000-level.

The rupiah exchange rate, based on the Jakarta Interbank Spot Dollar Rate (Jisdor), slightly strengthened to Rp 13,879 per dollar on Friday after falling to Rp 13,930 per dollar on Thursday, the lowest since the beginning of the year. In the spot market, the rupiah exchange rate plunged deeper to Rp 13,975 per dollar on Monday .

The JCI closed the week at 5,919, down 6.6 percent from 6,337 on the previous Friday. During trading Friday, the JCI had dropped deeper to 5,885, the lowest level during the day.

Bhima Yudhistira, an economist at the Institute for Development of Economics and Finance (Indef) said in Jakarta on Tuesday that the rising BI seven-day reverse repo rate could be the solution to cope with the global pressure.

Moreover, the weakening of the rupiah and rising oil prices are predicted to trigger an increase in the inflation rate. BI, therefore, needs to raise the seven-day reverse repo rate from the current 4.25 percent as external pressures continue to weaken the rupiah.

On the other hand, BI may face a dilemma in cutting the interest rates as it would be against the will of companies. "If interest rates rise, investment instruments such as bonds and stocks will be more attractive to investors. The best way to cope with the volatility of the rupiah in the short term is to raise the reverse repo rate by 25-50 basis points, "he said.

Bank Mandiri chief economist Anton Gunawan said the central bank should anticipate the possibility of further US Federal Reserve (Fed) interest rate hikes by raising its benchmark rate. “It should be done in order to curb foreign capital outflows due to higher US government bond yields.

The rise in the yields and strengthening of the dollar occurred along with improvement in the US economy. This condition increases the chances that the rise in the US interest rate or Fed Fund Rate will be accelerated. As a result, investing in US dollar tangible assets becomes more attractive.

"There are efforts from global investors to encourage BI to raise interest rates. If the central bank does not respond, it would be too late. There is a selling pressure on bonds and shares," he said.

Anton emphasized that the rise in the benchmark interest rate would not necessarily result in the increase of lending rates, which could further burden entrepreneurs. As long as credit growth does not take place too quickly, banks will not directly raise their lending interest rates.

Kompas

A display monitor shows the movement of the Jakarta Composite Index (JKSE) on Tuesday (24/4/2018) at the Indonesia Stock Exchange in Jakarta. The JKSE closed down 1.24 percent on Tuesday, or down 78.51 points to 6,229.63.

Should be weakening

UOB Indonesia chief economist and market research Enrico Tanuwidjaja said the rupiah would continue to weaken against the dollar gradually as Indonesia\'s current-account deficit was predicted to widen from 1.7 percent of gross domestic product (GDP) in 2017 to 2.1 percent of GDP in 2018.

"We still have to issue bonds denominated in rupiah or foreign currencies so as to meet the need for US dollars. The dividend paid to overseas in April was also in foreign currencies," Enrico said.

Previously, UOB Indonesia predicted a 25 basis points (bps ) increase in BI\'s benchmark interest rate in the fourth quarter, 2018. However, the threat of inflation has emerged since entering the second quarter of 2018 so that BI is expected to raise the benchmark interest rate 25-50 bps faster.

On Thursday, last week, BI Governor Agus Martowardojo said if the pressure on the rupiah exchange rate continued and could potentially hampered efforts in achieving the inflation target and disrupted the stability of the financial system, BI would consider adjusting the  reverse repo rate.

Separately, Muhammad Nafan Aji Gusta, an analyst at Binaartha Sekuritas, said the volatility of the JCI movement had declined as selling pressure had begun to weaken. This could be a sign that the trend of price reversal will occur in the near future. "JCI\'s movement indicates a potential buying mood, which could result in potential price increases this week," he said.

PT Indosurya Bersinar Securities analyst William Suryawijaya said the movement of the JCI this week would be influenced by market perceptions on the April 2018 inflation announcement, which is expected to remain positive.

(DIM)