Bank Indonesia Raises its Interest Rate to 6.0% to Support the Rupiah
The central bank of Indonesia (Bank Indonesia) decided today to raise its benchmark interest rate by 25 basis points to 6.0 percent. The decision was made amid concerns about the inflationary impact of a hike in subsidized fuel prices (planned this June) as well as increasing uncertainty in global financial markets as central banks' may scale back stimulus programs. The Indonesian rupiah has weakened considerably in 2013 and forms the worst performer in Asia after the Japanese yen among the 11 most-traded currencies tracked by Bloomberg.
The 25 bps increase in the benchmark rate (BI rate) - in combination with the 25 bps hike of the deposit facility rate known as the Fasbi to 4.25 percent - indicates the central bank's intention of supporting the IDR rupiah by encouraging lenders to store money at the central bank, while making it less attractive for people to borrow money from lenders, thus reducing the money supply in society.
Indonesia's main stock index fell 1.92 percent today (13/06) due to domestic and international concerns. On the domestic side, negative market sentiments were brought on by the fuel subsidy issue (and its inflationary pressures), the weakening rupiah, the BI rate hike, falling foreign exchange reserves, and the trade deficit. Internationally, speculation about central banks (USA and Japan) that want to reduce stimulus programs and the lower forecast for global economic growth (China's economic growth particularly) make investors shy away from emerging markets, including Indonesia.
The impact of the BI rate hike may be felt most in Indonesia's property sector, according to Edwin Sebayang, Head of MNC Securities in an interview to Bisnis Indonesia (13/06). Stocks in Indonesia's property sector have - by far - outperformed Indonesia's main stock index (IHSG) this year so far.
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