By Ying Xian Wong
Indonesia's central bank delivered its first rate hike of the year, defying broad projections for a hold as it looks to support a tumbling rupiah.
Bank Indonesia on Wednesday raised its benchmark seven-day reverse repo rate by 25 basis points to 6.25%, tightening policy settings for the first time since October last year.
The decision is a "pre-emptive and forward-looking step to strengthen rupiah's stability and cushion the impact of worsening global risks," Bank Indonesia Gov. Perry Warjiyo said at a press conference.
Speculation had been high heading into the meeting, with analysts saying the decision would be tough to call. Consensus estimates had been pointing to a hold but some economists were betting on a hike. Five out of seven economists polled by The Wall Street Journal had expected a hold decision, while the other two had pencilled in a 25-basis-point hike.
Bank Indonesia's move comes as the rupiah, like many of its peers in the region, is under heavy pressure from a strong dollar and other factors. The Indonesian currency has been languishing around four-year lows versus the greenback, down about 5% so far this year.
Delayed expectations for rate cuts by the Federal Reserve have also pushed back timelines for easing by central banks in Asia. That underlines the dilemma for policy makers as they look to sustain economic growth and currency stability. Most banks in Southeast Asia have continued to hold rates steady for now as they watch to see how inflation and currency pressures unfold.
Bank Indonesia said Wednesday it will continue using all available tools to keep the rupiah steady.
The rupiah strengthened slightly for a brief moment after the rate announcement, and USD/IDR was last flat 16,158.
The hike is also aimed at ensuring inflation remains within the target range of 1.5%-3.5% both this year and the next, Warjiyo said.
Indonesia's economy remains resilient amid rising global uncertainty, with growth in 2024 likely to come in at 4.7%-5.5%, the central bank governor said. The country's economy expanded 5.05% last year.
The bank also raised its overnight deposit facility rate and lending facility rate by 25 basis points each to 5.50% and to 7.0% respectively.
BI has raises rates in past periods of currency instability but there is doubt among economists about the effectiveness of the measure.
A 25-basis-point hike will likely not be enough to steady the rupiah, OCBC Asean economists Lavanya Venkateswaran and Ahmad A Enver said. The global backdrop remains volatile and concerns over Indonesia's growth may soon start to take precedence, with the economy tipped to slow and exports underperforming those of regional peers, they said in a note.
"A modest hike is no panacea for rupiah weakness," DBS senior economist Radhika Rao said in a note.
Still, a pre-emptive hike could serve to instil confidence and build in a rate advantage for the rupiah, DBS said in a note.
In the event of further weakness in the rupiah, Capital Economics sees more hikes as likely.
"But the central bank will certainly be wary about overdoing the tightening cycle," senior Asia economist Gareth Leather wrote in a commentary.
Concerns about the growth outlook are mounting amid signs that tighter monetary policy and weak global demand are weighing on economic activity, he said.
"With inflation very low and growth struggling, the central bank will be wary about tightening policy too aggressively and we doubt today's hike marks the start of a prolonged hiking cycle."
Write to Ying Xian Wong at yingxian.wong@wsj.com
(END) Dow Jones Newswires
04-24-24 0449ET
