Yellen's RamadHan Gift

Disappointing US employment numbers is likely to delay the planned US dollar interest rate hike. Last week, Federal Reserve Chief Janet Yellen stressed uncertainties faced by the US economy, prompting analysts to project a delay in a US dollar interest rate hike to August or September of this year. Coming at the first day of the Ramadhan fasting month, it gave the rupiah and other regional currencies some breathing room, with the rupiah strengthening and stabilizing at Rp13,200 per US dollar. But Bank Indonesia has also been quite active in defending its currency, reflected by the drop in its exchange reserves to US$103.6 billion from US$107.7 billion a month ago. The question is whether this trend can be maintained and whether the central bank will move to stimulate the economy by further bringing down the rupiah's current 6.75 percent benchmark interest rate.

The month of Ramadhan always brings with it a positive boost to the economy as consumption rises. But this surge, if not managed well with sufficient food supplies, could also raise prices. Indeed, this is already happening. Inflation is always higher during Ramadhan, but it has a tendency to shoot far beyond Bank Indonesia's inflation target. Should this occur, it makes moving down the rupiah interest rate more difficult, even with a more stable currency.

June 14, 2016