Indonesia’s central bank Governor Perry Warjiyo said his quick action in raising interest rates has helped to stabilize the currency, adding that more policy tightening and market intervention may be needed if conditions warrant it.
In his first interview with international media since he took office two weeks ago, Warjiyo said previous episodes of market turmoil — like the 2013 taper tantrum — has taught him to act early.
“One of the key lessons is that you have to pre-empt the uncertainty,” he said in an interview with Bloomberg Television’s Haslinda Amin in Jakarta on Wednesday. “It’s one of the first things we did. To pre-empt the uncertainty of the possibility of the Fed Funds rate increasing more than three times,” as well as the impact of the U.S. fiscal deficit on Treasury bill yields and rising global risk, he said.
Indonesia has been one of the hardest hit economies in Asia amid a global emerging-market selloff sparked by rising U.S. interest rates and a stronger dollar. With the Federal Reserve widely expected to raise rates again next week, central banks are bracing for further volatility.
India’s central bank raised its benchmark rate on Wednesday, joining Asian nations from the Philippines to Malaysia in tightening policy.
In Indonesia, the new governor has moved aggressively to counter the market volatility, holding an out-of-cycle meeting last week in which he increased the benchmark rate by 25 basis points to 4.75 percent. That was the second rate hike by Bank Indonesia in less than two weeks.
His actions have won the backing of the International Monetary Fund, which said Indonesia is in a much stronger position to face external shocks.
“You have to pre-empt the uncertainty,” he said. “And thank goodness, after pre-empting those bouts of uncertainties, our rupiah has been quite strong or stable. I want it to be stronger than now. It’s still overshooting.”
The rupiah has gained more than 2 percent against the dollar since the governor took office on May 24, among the best performers in emerging markets. Warjiyo said more tightening will depend on how financial and economic developments pan out.
“Yes, there is a possibility of a rate hike,” he said. “Of course, the magnitude and timing will be measured and will depend on our calibration of new information that will be coming.”
The governor said the central bank will continue intervening in the currency and bond markets to ensure that the adjustment is smooth.
“We will stand ready if there is pressure in the market, like the one that we are seeing since early February,” Warjiyo said. “This is beyond normal, this is the thing that the market is in the process of adjustment.”
To be effective, currency intervention must be accompanied by buying government bonds from the secondary market because the exchange rate is linked to foreign purchases of government debt, he said.
Warjiyo assured that the economy remains sound despite recent selloffs. Investors have dumped about $1.9 billion of Indonesian bonds since the end of March and the Jakarta Stock Exchange Composite Index is down more than 4 percent this year.
“Look at Indonesia’s fundamentals. Look carefully, look at how Indonesia has been resilient in coming forward in every tension from external,” he said. “We are ready to take action to make sure that our economic fundamentals are strong and we build a layer of support for resilience.”
Bank Indonesia expects the economy to expand 5.1 percent to 5.2 percent this year, from 5.07 percent in 2017.
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