Hopeful for Next Year

Last week, after Bank Indonesia (BI) cut its benchmark interest rate by 25 basis points to 4.5 percent, the rupiah slightly weakened to Rp 13,359 per US$1, but quickly strengthened and remained stable atthe Rp 13,340 per US$1 level. It turns out that market concerns of a sharp drop in the rupiah's value has not happened. The concern was that a further cut in the rupiah interest rate, at a time when the US Federal Reserve plans to raise US-dollar interest rates, will weaken the rupiah as foreign funds move into US dollar-denominated assets. A decline in rupiah interest rates will no doubt lighten the debt service burden of borrowers. This is critical given that corporate revenues have been soft throughout this year. But the hope that a rate cut will help boost economic growth for the remaining part of the year, will be difficult to realize, considering that the year is nearly over.

September 5, 2017