Has the Pacific switched to interest-rate rises rather than cuts?

As we approach summer in the Northern Hemisphere we can look back on a year that is not going as planned. We began 2024 with markets on a surge backed by anticipation of a succession of interest-rate cuts which were supposed to begin in March. Such thoughts may be causing a bit of an itch as we observe one piece of news from the Pacific this morning.

The Bank Indonesia Board of Governors (RDG) meeting on April 23-24 2024 decided to increase the BI-Rate by 25 bps to 6.25%, the Deposit Facility interest rate by 25 bps to 5.50%, and the Lending Facility interest rate by 25 bps to 7.00%.

For starters this completely wrong footed Bloomberg who as you can see below we heading in the opposite direction.

Indonesia’s central bank will likely postpone monetary easing to later this year, if not early 2025, as it waits out uncertainty around the Federal Reserve’s rate path and the continued fighting in the Middle East.

Although I suppose they were right about this.

The survey results underline how the bar for rate cuts is getting higher

What is going on?

The Bank Indonesia explanation starts by looking to cover every base it can.

This interest rate increase is to strengthen the stability of the Rupiah exchange rate from the impact of worsening global risks and as a pre-emptive and forward looking step to ensure inflation remains within the target of 2.5 ± 1% in 2024 and 2025 in line with the pro-stability monetary policy stance

Let us start with inflation which according to the Indonesian statistics office is doing this.

The year-on-year (y-on-y) inflation rate in March 2024 was 3.05 percent, with a Consumer Price Index (CPI) of 106.13. The highest inflation by province was seen in Papua Barat Province at 4.78 percent with a CPI of 106.61, while the lowest was seen in Papua Barat Daya Province at 1.42 percent with a CPI of 103.82.

So as you can see it not only has quite wide regional variations but the headline is moving towards the upper end of the targeted range especially if we note the monthly move.

The month-to-month (m-to-m) inflation rate in March 2024 was 0.52 percent, and the year-to-date (y-to-d) inflation in March 2024 was 0.93 percent.

Also look at what is in the van of the annual inflation rise.

Inflation occurred as the prices went up, as indicated by the increase in most expenditure groups indices, namely: Food, Beverages, and Tobacco Group of 7.43 percent;

Along the way they have swerved the danger of an “I cannot eat an I-Pad” moment.

Meanwhile, Information, Communication, and Financial Services Group recorded a deflation of 0.13 percent.

But whilst that works an interest-rate of 6% should be well into restrictive territory so there is another explanation.

Indonesian Rupiah

We only need to go back to Sunday to see that something was going on.

Jakarta (ANTARA) – The government is currently devising strategies for protecting the exchange rate of rupiah from adversary impacts of the Iran-Israel conflict, Finance Minister Sri Mulyani Indrawati has said.

Those who have followed the use of the word resilient in financial matters such as the Irish banks and Greece will have been immediately on alert as she added this.

“I believe that Indonesia will stand resilient in the midst of this situation,” she said.

We can look at it another way as despite the rhetoric below foreign exchange reserves are on the decline.

The position of reserve assets in Indonesia remained high at the end of March 2024, totalling USD140,4 billion, despite retreating from USD144,0 billion at the end of February 2024.

We are back to themes of 2024 that has so far not turned up as one from 2023 remains.

Bank Indonesia’s  exchange rate policy  continues to be directed at maintaining Rupiah stability  from the impact  of a broadly strengthening US dollar .

That of course means trying to stop it declining and one way today’s statement tries that is to make comparisons.

 This development put depreciation pressure on almost all world currencies , including the Rupiah exchange rate. The Japanese Yen and New Zealand Dollar each weakened 8.91% and 6.12% (ytd), while regional currencies, such as the Thai Baht and Korean Won weakened 7.88% and 6.55% (ytd) respectively. . Meanwhile, the weakening of the Rupiah up to April 23 2024 was recorded to be lower, namely 5.07% (ytd).

Unfortunately they then rather torpedo the Rupiah ship of state as they reveal they have been on the bid.

Bank Indonesia continues to strengthen its Rupiah exchange rate stabilization policy by optimizing all available monetary instruments, both through intervention in the spot and DNDF foreign exchange markets, purchasing SBN from the secondary market if necessary, adequate liquidity management, and other necessary steps.

That rather contrasts with Japan for example which as I have pointed out many times has been trying to get a weaker Yen. We have seen another example of that this morning.

JAPAN’S OCHI: USD/JPY MOVE TO 160 COULD TRIGGER ACTION; NO ACTIVE DISCUSSION YET ( @DeltaOne)

That is almost asking foreign exchange markets to send it there.

But if we return to the Rupiah we see that an exchange rate of 16,149 versus the US Dollar is in sight of the pandemic lows and may even evoke fears of the 1998 currency crisis. I mean in terms of fall not levels as the direction of travel has overall been lower.

I do not know about you but looking at the moves a 0.25% change is minor and unlikely to change much. Or putting it another way if 6% is not enough exactly how does 6.25% fix it? So as I have pointed out before you can end up on a slippery slope where you keep raising rates.

Credit

Currency falls are regularly associated with a credit boom. Or if you prefer a part of economics 101 that frequently works as in more of a currency lowers its price.

Bank credit growth continues to increase.  In the first quarter of 2024, credit grew high by 12.40% (yoy) driven by credit growth in almost all economic sectors.

Indonesia has a good economic growth rate at 5.04% at the end of last year bit that still looks rather hot. So we have a yes and it comes with something else which is troubling.

banks are optimizing credit funding through asset management strategies by paying attention to aspects of  safety ,  liquidity  and  profitability .

We now what statements like that are often followed by…

Comment

Today we have looked at Indonesia specifically but we have also seen the general theme of currency weakness against the US Dollar more generally in play. Now let me head south to a land down under. Because last month the Reserve Bank of Australia told us this.

Recent information suggests that inflation continues to moderate, in line with the RBA’s latest forecasts. The headline monthly CPI indicator was steady at 3.4 per cent over the year to January, with momentum easing over recent months, driven by moderating goods inflation.

Whereas this morning we were told this.

• The Consumer Price Index (CPI) rose 1.0% this quarter.
• Over the twelve months to the March 2024 quarter, the CPI rose 3.6%.
• The most significant price rises this quarter were Rents (+2.1%), Secondary education (+6.1%), Tertiary education (+6.5%) and Medical and hospital services (+2.3%). ( ABS)

It is the 1% quarterly rise that attracts my attention. Also the numbers are worse than they look because the government is subsidising energy prices which would otherwise be higher.

Are you thinking what I am thinking?