An Unexpected Year-end Gift

Fears of a weakening rupiah, when the US Federal Reserve (the Fed) hikes its interest rate, didn't happen, bringing a sigh of relief to the global markets. A few days after the Fed raised US interest rates by 0.25 percent, the rupiah actually strengthened to Rp13,648 per US dollar from Rp14,009 a day before the announcement. This is an unexpected gift for Bank Indonesia, which was preparing for a potentially volatile rupiah. At least, the country's reserves, which have shrunk to a low of US$100.2 billion, can be kept intact before year's end.

Indeed, the Fed, since the leadership of Ben Bernanke and later Janet Yellen, has long prepared the market for this interest rate hike, even as to how much and the rough timing. Therefore, market players have long been able to make investment decisions based on an increased interest rate. Consequently, portfolio adjustments and the fund flow that follows occurred much earlier, before last week's policy announcement. It is never easy to properly prepare the markets and set the right timing, but judging from the calm reaction of the world's capital markets, the Fed prepared and got the timing just right. One less uncertainty, given the volatile year, was welcomed by the capital markets.

December 29, 2015