Renewed Rupiah volatility
The Indonesian economy is currently facing a new challenge of “monetary uncertainty”. Part of the reflection of this uncertainty is the renewed volatility in the exchange rate of the rupiah.
Having achieved a certain level of stability for the past few years, the Indonesian economy once again must face increased volatility of the rupiah. The volatility stemmed from the not-so-responsive monetary policy in the face of stepped-up increases in the US Fed Funds rate. The latest episode of volatility took place after the April meeting of the Monetary Council of Bank Indonesia, which left the benchmark interest rate unchanged. While many already expected a rate hike, the Board of Governors of Bank Indonesia felt compelled to hold the rate unchanged.
Several factors influenced that inertia. The first was the strong aspiration of the government for a low interest rate environment in the country. The second was the upcoming change of the Governor of the Central Bank. The third was the interim time from the appointment of the new Governor until the formal change-over. These factors basically affected the likelihood of the change in the monetary perspective of the Central Bank.
In other economic news, the external sector reported a big positive jump, from a deficit to a significant surplus in the trade balance. The trade balance in March showed a significant surplus of $1,091.7 million, from a deficit of $52.9 million in February. With the current surplus, the total trade balance in Q1 2018 resulted in a surplus of $282.8 million. Indonesian exports increased considerably from the previous month, reaching $15,579.8 million, the highest recorded exports in the past few years, and an increase of 10.24% from $14,132.6 million in February. At the same time, imports also increased, albeit at a slower pace, from $14,184.5 million in February to $14,488.1 million in March, an increase of 2.13%. However, total imports in April can be expected to rise ahead of the upcoming Muslim fasting month, which begins in mid-May 2018.
In the domestic economy, the month of March 2018 was marked by relatively mild inflation of 0.2%. Yearly inflation in March 2018 stood at 3.4%, a level at the lower end of the target corridor of the Central Bank. With inflation generally under control, the Central Bank decided to keep the benchmark rate constant at 4.25% at its recent meeting of the Monetary Council in April 2018. However, this decision was met negatively by the market, which felt that the Indonesian Central Bank was behind the curve in its interest rate policy because the US Federal Reserve has already increased the Fed Funds rate and declared it would like to increase the interest rate further.
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