Report Mr. Perry, Rupiah Breaks Above IDR 14,700/US$!

Jakarta, CNBC Indonesia – The rupiah was still unable to rise against the United States (US) dollar in trading Thursday (19/5/2022). Extending the bad record, where throughout the month of May, the rupiah has never recorded a strengthening.

According to Refinitiv data, the rupiah actually opened trading by strengthening 0.1% to Rp 14,670/US$. But in just a few seconds, the rupiah was cut short, and the rupiah turned down 0.17% to Rp 14,710/US$ at 9:04 WIB. This level is the weakest since October 20, 2020.

Signs that the rupiah will weaken can already be seen from its movement in the non-deliverable forward (NDF) market, which is weaker this morning than just after yesterday’s closing.

Interest rates in the United States that will continue to be raised put pressure on the rupiah.

Last Tuesday, the chairman of the US central bank (The Fed) Jerome Powell said he would not hesitate to raise interest rates above neutral levels to curb inflation.

“What we need to see is inflation coming down in a clear and convincing way. If we don’t see that, we have to consider moving more aggressively,” he told the Wall Street Journal conference quoted from Reuters.

Interest rates are said to be neutral if they are at a level that does not stimulate the economy but does not depress it either. Interest rates in the US in a neutral position are expected to be at the level of 3.5%, and are likely to be at that level next year. This is because the market now sees that at the end of the year the Fed’s interest rate will be in the range of 2.75% – 3%, meaning that there will be another 200 basis points increase.

Interest rates are above neutral, meaning that it can put pressure on the economy, and Powell also admits that. However, he said there were “many steps” that could be taken to prevent the US economy from falling into a deep recession.

The aggressive increase in interest rates will inevitably make Bank Indonesia (BI) also raise interest rates so that the attractiveness of domestic assets is still maintained. BI’s benchmark interest rate is currently 3.5%, and continues to narrow with the United States.

The impact has already been seen in the Indonesian bond market, which experienced capital outflow up to Rp 78 trillion so far this year. In addition, in addition, bond auctions have also become less attractive. Last week, only Rp 19.7 trillion came in, below the indicative target of 20 trillion and only 7.7 trillion won.

BI Governor Perry Wajiyo and colleagues will hold another Board of Governors Meeting (RDG) on 23 and 24 May. The possibility of BI raising interest rates is still there, but it seems unlikely, because BI will probably first observe the development of core inflation after Ramadan.

However, market participants will see if BI is still dovish or will a little hawkish by indicating that interest rates will increase in semester II-2022. If that happens, the rupiah certainly has the power to strengthen.

CNBC INDONESIA RESEARCH TEAM

[Gambas:Video CNBC]