Responding to Rupiah Weakening, BI Raises Reference Interest Rate by 50 bps

Bank Indonesia (BI) has again raised its benchmark interest rate to curb volatility in the domestic financial market. In a Board of Governors meeting (Rapat Dewan Gubernur or RDG) held on June 28-29, 2018, it was decided to increase the BI 7-day Reserve Repo Rate by 50 basis points (bps) to 5.25%. This is the third increase in the last two months. Furthermore, BI also raised the Deposit Facility rate by 50 bps to 4.5% and the Lending Facility rate by 50 bps to 6%, effective June 29, 2018.

Throughout May-June 2018, BI has raised its benchmark interest rate by a total of 100 bps to 5.25%. This policy follows the move by the US central bank (The Fed) which has raised its benchmark interest rate by 75 bps since the end of last year. This latest rupiah interest rate hike widens the gap with the US dollar interest rate to 325 bps from the previous 275 bps. However, the central bank must conserve its ammunition – interest rate hikes – in curbing rupiah volatility. This is because rupiah volatility is expected to persist, and interest rate hikes will have a negative impact on economic growth in the long term. To mitigate the economic slowdown resulting from the interest rate hikes, BI will implement loan-to-value (LTV) ratio relaxations.

This positive sentiment was immediately responded to by investors who bought shares on the stock exchange. As a result, the Jakarta Composite Index (IHSG) on the Indonesia Stock Exchange rose 131.92 points (2.33%) to 5,799.237 from the previous day's closing. Similarly, the rupiah strengthened by 64 points (0.44%) to 14,330 per US dollar from the previous day's closing.