To Raise or Not to Raise

On Thursday, the US Federal Reserve (Fed) finally made its much-awaited decision. The choice was whether to raise US interest rates now, to manage US inflationary concerns, or to postpone it, and to avoid sizable capital outflows from emerging and other non-US markets. At the end of the meeting they decided to postpone the rise of US interest rates, which has been kept at an unprecedented low, 0-0.25 percent level, for nearly a decade. This low interest policy was kept to help the US economy recover, followingthe Lehman financial crisis. Today, the US economy is showing signs of recovery and a drop in its unemployment rate. However, the Fed is concerned that its rate hike policy will weaken other currencies, especially those from emerging markets, especially when the world economy remains fragile.

The Fed's choice brought a sigh of relief to markets worldwide. At the close of Friday trading, the rupiah strengthened to Rp14,374 per US dollar from Rp14,459 the day before. However, with our foreign exchange reserves dropping US$2.1 billion in a month's time to US$105.4 billion, Bank Indonesia cannot afford to continue supporting the rupiah. With US dollar demand remaining high and the supply from export proceeds declining, the central bank might have to let the rupiah weaken faster and further than it would like.

September 22, 2015