Bank Indonesia raised the rate it pays lenders on overnight deposits and said it’s ready to buy government debt in the secondary market as Governor Agus Martowardojo moves to boost confidence in the rupiah weeks after taking charge.
The central bank raised the deposit facility rate, also known as the Fasbi, by a quarter of a percentage point to 4.25 percent effective today, it said in a statement after a board meeting yesterday. The increase is a preemptive step to maintain stability after the rupiah weakened and Bank Indonesia will ensure sufficient liquidity in the market, it said.
Indonesian policy makers have struggled to contain the rupiah’s plunge as a delay in fuel-subsidy cuts hurts investor sentiment, with the country’s currency reserves dropping as the central bank sold dollars. Rupiah forwards, which weakened to the lowest in more than three years this week, rose today following the decision, along with stocks and government debt.
“BI’s decision to raise its Fasbi rate overnight was unexpected, but a step in the right direction,” said Lim Su Sian, an economist at HSBC Holdings Plc in Singapore. “In the next few days, if there is finally an announcement on fuel subsidy cuts, this could give market sentiment towards Indonesian rupiah assets another shot in the arm.”
The Jakarta Composite Index (JCI) erased earlier declines to rise for the first time in five days today, with the benchmark posting its biggest gain in almost nine months.
The rupiah weakened 0.4 percent to 9,860 per dollar as of 4:40 p.m. in Jakarta, prices from local banks compiled by Bloomberg show. It has declined 4.8 percent in the past 12 months and is the worst performer in Asia after the Japanese yen among 11 most-traded currencies tracked by Bloomberg.
The rupiah’s weakness is temporary, Finance Minister Chatib Basri told reporters today. The central bank will ensure the currency level reflects fundamentals, Martowardojo said.
Bank Indonesia is ready to supply dollars in a “large quantity” to stabilize the currency, as well as buy government bonds in the secondary market sold by overseas investors, Deputy Governor Perry Warjiyo said in a text message today. The central bank is prepared to purchase government debt in any amount, he said.
“Bank Indonesia is fully prepared to take necessary measures to stabilize monetary conditions in light of recent rupiah depreciation,” the central bank said in its statement. “Bank Indonesia will continue to meet the market requirement for rupiah and forex liquidity. These preemptive measures are taken to maintain monetary stability.”
“What the BI is trying to do is instill some confidence in the rupiah following the panic in the market over the past couple of days,” said Gundy Cahyadi, an economist at Oversea-Chinese Banking Corp. in Singapore. “The fact that the central bank doesn’t want to wait until the scheduled meeting this week is a strong signal that the central bank wants to portray the idea that they are willing to be ahead of the curve.”
The rupiah’s one-month non-deliverable forwards gained 1.6 percent, the most since June 2012, to 10,120 per dollar, data compiled by Bloomberg show. The contracts touched 10,412 yesterday, the weakest level since August 2009.
Overseas investors have pulled $1.9 billion from stocks and local-currency bonds in Indonesia the past two weeks, putting pressure on the rupiah as rising U.S. Treasury yields lure capital from emerging markets. Prior to today’s gain, the Jakarta index had lost almost a 10th of its value this month.
Some banking stocks fell today even as the benchmark rose 1.9 percent.
“The higher FASBI rate is a pretext for higher interest rates in general,” and will have an impact on the banking sector, said Tjandra Lienandjaja, an analyst at PT Mandiri Sekuritas in Jakarta. “We expect Bank Indonesia to raise its BI rate, but maybe not this month.”
Standard & Poor’s cut its rating outlook on Indonesia’s debt to stable from positive last month, saying a stalling of reform momentum and a weaker external profile had reduced the chance of an upgrade over the next 12 months. Failure to lower subsidies in 2012 led to a record current-account gap, hurting the rupiah as foreign investors lost confidence.
Indonesia is consuming foreign-currency reserves at the fastest pace in Asia as policy makers struggle to contain the rupiah’s plunge. Reserves dropped 5.7 percent in a year to $105 billion in May as the central bank sold dollars to bolster the rupiah, while authorities from South Korea to Taiwan added to coffers, data compiled by Bloomberg show.
The Fasbi rate is “in many ways more important” than the reference rate because it represents the floor for interbank borrowing costs, according to analysts at DBS Group Holdings Ltd. There is no incentive to lend at levels below what they can earn at Bank Indonesia, so Fasbi-rate changes can have a “significant impact” on interbank rates and the rest of the yield curve, they said.
“Bank Indonesia is raising the Fasbi rate to avoid further speculation on the rupiah and to affirm its commitment in tightening monetary bias, given higher inflation expectations ahead,” said David Sumual, a Jakarta-based economist at PT Bank Central Asia.
Consumer prices are forecast by economists to accelerate as President Susilo Bambang Yudhoyono’s administration plans to raise fuel prices to contain expenditure on subsidies. Yudhoyono has made any boost in fuel prices conditional on Parliament approving compensation programs for the poor. Inflation may peak at about 8 percent within three months of a price increase, Chua Hak Bin of Bank of America Corp. estimated.
The Fasbi rate was last raised in August. Economists from HSBC to Citigroup Inc. had predicted the central bank will raise the Fasbi before the reference rate.
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