Indonesia says Fed must be mindful of policy impact on others

Bank Indonesia towers rise behind fountain in Jakarta on 4 February, 2011. ( Romeo Gacad / AFP Photo)

Indonesia’s new central bank chief joined his counterpart in India in calling on the Federal Reserve (Fed) to be more mindful of the global repercussions of policy tightening amid a rout in emerging markets.

In his first interview with international media since he took office two weeks ago, Bank Indonesia Governor Perry Warjiyo said the pace of the Fed’s balance sheet reduction was a key issue for central bankers across emerging markets. Reserve Bank of India Governor Urjit Patel made similar comments earlier this week, arguing that slowing the pace of stimulus withdrawal would support global growth.

“We know every country must decide their policy based on domestic circumstances but look, you have to take account of your actions and the impact of your actions on other countries, especially the emerging markets,” Warjiyo said in Jakarta on Wednesday.

With the Federal Reserve proceeding with its policy tightening, and another interest rate hike expected next week, emerging markets across the globe are bracing for a further selloff. Bank Indonesia has already raised its key rate twice to help bolster its currency, while the Reserve Bank of India on Wednesday became the latest to move, increasing its policy rate by 25 basis points to 6.25 percent.

Dollar is king

“Communication is very important,” Warjiyo said. “We are looking for the Fed to communicate more clearly the intention of their policy so the market can understand clearly and also react and all the central banks can also anticipate and consider it in their policy making.”

The comments underscore the difficult policy choices central bankers are being forced to make as they try to respond to external forces driving their currencies.

South African central bank Governor Lesetja Kganyago said on Tuesday the Fed is communicating its intentions better than it did in 2013 during the taper tantrum, but its job is being complicated by United States (US) fiscal policy.

“Nobody figured out that the US could embark on all of these trade policies that they had embarked on and that complicates the work of the Fed,” he said in Johannesburg. “I don’t think that they had factored in earlier that there will be stimulus that had been put in for the US economy from the fiscus.”

Policy normalization in Japan and Europe will bring more uncertainty. Warjiyo said that while the “dollar is king” at the moment, it may lose that status next year.

“There are three global players that impact the future of interest rates and exchange rates. Now it’s only the US,” Warjiyo said. “That’s why the US and the dollar are king. But next year if Europe starts normalizing, Japan starts normalizing, then I don’t think the US or the dollar will be the only king.”

In Indonesia, Warjiyo has moved decisively to support the rupiah, holding an out-of-cycle meeting last week in which he increased the benchmark rate by 25 basis points to 4.75 percent.

By pre-empting the uncertainty in financial markets, the central bank has been able to stabilize the currency, Warjiyo said on Wednesday, adding that more rate hikes are possible if financial and economic conditions warrant it.

“Yes, there is a possibility of a rate hike,” Warjiyo said. “Of course, the magnitude and timing will be measured and will depend on our calibration of new information that will be coming.”

Indonesia has been one of the hardest hit economies in Asia amid a global selloff, with investors dumping almost US$1.9 billion of government bonds since the end of March. The central bank has also been leaning heavily on its stash of foreign reserves, draining more than US$7 billion since the end of January as it intervened to help stabilize the rupiah.

Currency moves

Bank Indonesia will continue to intervene in markets if conditions warrant it, Warjiyo said. “We will stand ready if there is pressure in the market, like the one that we are seeing since early February,” he said.

The rupiah has gained about 2 percent against the dollar since the governor took office on 24 May, among the best performers in Asia. It rose 0.2 percent to 13,857 against the US dollar on Wednesday, the highest closing level since 19 April, trimming losses this year to 2.1 percent.

While the currency, bonds and stock markets will remain closed from 11 June through to 19 June, the central bank will closely monitor global market reaction to the Fed meeting outcome next week and will take steps to restore confidence, Warjiyo said. – Bloomberg