BI rose rates for the second time in 2018 by 25bps to 4.75% as a preemptive move to stabilise the rupiah against the projected higher-than-expected interest rate hike in the US and the increasing risks in the global financial market. With BI having changed its monetary policy stance from “neutral” to “tight bias”, we foresee room for further rate hikes in order to provide further stability for the rupiah.

We believe policymakers in Asia are under pressure to raise rates. For instance, the Philippine central bank raised its benchmark rate in May and is prepared to take more action if needed. We have brought forward our calls for a rate hike in India. We expect the policy rate to be raised in the June 6 meeting by 25bps to keep inflation in check and stem declines in the rupee.

• Bank Indonesia (BI) has decided to raise its seven-day reverse repo rate to ensure stability against volatility that is expected to rise out of the US Federal Reserve’s planned interest rate hike.

• BI raised its policy rate by 25 basis points (bps) to 4.75%. It also increased the lending and deposit facility rates by 25bps to 5.5% and 4% respectively. It is the second rate hike in 2018 and is part of a preemptive move to stabilise the rupiah against the projected higher-than-expected interest rate hike in the US, as well as the increasing risks in the global financial market.

• With BI having changed its monetary policy stance from “neutral” to “tight bias”, we foresee room for further rate hikes in order to provide further stability for the rupiah. It is poised to act positively for investors. Higher rates seem vital in the current global environment which is becoming less conducive for risk taking.

• Besides, we believe policymakers in Asia are under pressure to raise rates. For instance, the Philippine central bank raised its benchmark rate in May by 25bps to 3.25% and is prepared to take more action if needed. We have brought forward our calls for a rate hike in India. We expect the policy rate to be raised in June 6 meeting by 25bps to 6.25% keep inflation in check and stem declines in the rupee.

Source: AmInvest Research - 31 May 2018