Jakarta. Indonesia's central bank said on Wednesday (09/05) it was intervening in the markets to support the rupiah and was preparing to adjust its benchmark interest rate, suggesting it may hike rates to shore up the currency, now at its weakest in two and a half years.
In a statement, Bank Indonesia (BI) said it was "in the middle of preparing firm and consistent monetary policy steps including by adjusting the seven-day reverse repo rate," its key rate.
BI said it was also "optimizing other monetary operation instruments" to ensure enough rupiah and dollar onshore liquidity.
BI has kept its benchmark rate steady since cutting it by 25 basis points last September. But last month, governor Agus Martowardojo said he would be ready to raise the key rate if the rupiah's weakness threatened its inflation target or financial stability.
On Tuesday, a deputy governor said the central bank will assess the level of inflation and trade balance as well as global capital flows and US interest rates before deciding whether to hike.
At Bank Indonesia's May 16-17 policy meeting, "if it's needed and is shown by those data that we have to raise the rate, then we will make an adjustment," deputy governor Mirza Adityaswara said. This week also saw data that showed the Indonesian economy grew at a weaker-than-expected pace of 5.06 percent in the first quarter, adding another headwind to markets already worried about outflows from the high-yielding rupiah bond markets.
BI said it was intervening to support the rupiah in both the currency and bond markets. The currency was trading on Wednesday at its weakest against the dollar since December 2015.
Finance Minister Sri Mulyani Indrawati said the government currently had enough cash on hand and that it could look for other ways to raise money if investors continue to ask for high yields in future bond auctions.
The yield on the benchmark 10-year government bond hit 7.316 percent on Wednesday, the highest since March 2017, as investors sold emerging market assets.
In Hong Kong, Changyong Rhee, director of the International Monetary Fund's Asia-Pacific department, said he was not too worried about recent selling pressure on assets in Indonesia and the Philippines as it was not triggered by domestic factors and Asia has stronger buffers than in the past.
"There is room for interest rates in Asia to also go up and also room to rely on the flexible exchange rate system more compared with the period in 1997," he said, adding though that it was "time to watch things closely."