All of Bank Indonesia’s efforts: in vain?
The rupiah has just fallen to its weakest reading since September 2009, dropping 0.34 per cent in early trading to 10,000 per US dollar.
The decline comes despite last week’s efforts by the central bank to combat inflation and a battered currency. It hiked its key lending rate by half a point to 6.5 per cent, more than the market was anticipating. (It also hiked the rate 25bps a month before).
But it’s the words of another central bank, the US Federal Reserve, that the markets are looking to.
On warnings that the Fed may scale back its stimulus measures, hot money is fleeing Asia. Indonesia was one of the hottest markets when investors searched for yield abroad, so naturally it’s been one of the biggest losers in recent weeks on concerns of Fed tapering.
The US dollar strengthened 1.3 per cent against the rupiah last month and 1.47 per cent in May.
The Jakarta Composite is down 0.7 per cent in early trading. It lost 4.9 per cent last month.
Update: Fitch Ratings just released a report saying that Bank Indonesia’s rate hikes are a positive for banking stability, because they will “help unwind credit risks” after years of rapid growth.
For highly capitalised Indonesian banks, we believe the risks from excessive loan expansion outweigh the negative impact on profitability from rising bad debt as a result of higher interest rates.