Bank Indonesia's governor stressed that the central bank is ready to act again to "ensure stability" after its first interest rate hike since 2014 failed to stop the rupiah from sliding on Friday. The rupiah, one of the worst performing Asian currencies this year, at one point was down 0.7 percent to 14,145 per dollar, its weakest level since October 2015.
Bank Indonesia (BI) entered the market "to smoothen rupiah volatility", its head of monetary management Nanang Hendarsah told Reuters, and at 0714 GMT, the currency was at 14,125 to the dollar. BI raised its benchmark interest rate by 25 basis points to 4.50 percent to try to bolster the rupiah. Agus Martowardojo, whose five-year term as governor ends next week, told reporters that "external and internal" factors explained the rupiah's slip on Friday, and that the market had already priced in the 25 basis point hike made late on Thursday.
"In general we continue to remain neutral but there is a statement that the public has to be clear about, and that is BI would take further steps if needed to ensure stability," he said. Many analysts took the governor's comment as a signal there could be more rate hikes. The central bank's next policy meeting is June 27-28, about two weeks after a Federal Reserve meeting, but BI has the power to change policy at any time.
Trimegah Securities told clients the US dollar "is still appreciating against global currencies and a rate hike would only slow down that momentum". Lukman Otunuga, an analyst with forex broker FXTM, described BI's hike to 4.50 percent as a lifeline for the rupiah, but said the dominant market theme globally remained a strong dollar. Indonesia's benchmark 10-year bond yield edged up to 7.260 percent on Friday, while the benchmark stock index in the afternoon erased earlier gains and was down slightly.
The rupiah has steadily weakened against the greenback in recent weeks as foreign investors dumped nearly $4 billion of Indonesian bonds and stocks since last month. Yield of the benchmark bonds has risen by around 1 percentage point. Indonesia is ready to accept the "new reality" of higher bond yields as long as they are in line with global market movements, Luky Alfirman, head of Finance Ministry's Budget Financing and Risk Management office told Reuters. "We can't hope for (yields) to be like last year because the benchmark, US treasury yields, has gone up," Alfirman said.
He said foreign investors gave positive feedback during "successful" recent roadshows to Europe for Eurobond sales and to Japan for its planned samurai bond sales. Indonesia will go ahead with selling samurai bonds this quarter, the official said.