Time to decouple Indonesian monetary policy from China

Time to decouple Indonesian monetary policy from China
This is Bloomberg today:
"Indonesia’s rupiah plunged the most in 13 months in onshore trading as Bank Indonesia allows a more rapid slide toward levels quoted in the offshore market. The yield on 10-year government bonds fell the most since 2008. The rupiah slid 1.6 percent to 10,225 per dollar as of 10:26 a.m. in Jakarta, according to prices from local banks. The currency reached 10,258 earlier, the weakest level since July 14, 2009. One-month non-deliverable forwards were 0.9 percent weaker than the spot rate at 10,320. That gap exceeded 5 percent last month for the first time since 2011. ...The central bank has allowed the rupiah to gradually depreciate, especially this month, Deputy Governor Perry Warjiyo said July 12. The nation recorded trade deficits in seven out of the past eight months, while its current account has been in shortfall for the six quarters through March, official data show."
This is good news - the Indonesian central bank - Bank Indonesia  - is going against the tide of Emerging Markets monetary tightening in response to weaker currencies. Lately the central banks of Brazil, Turkey and Poland have either increased interest rates or hiked interest rates to shore up their currencies. Today the Turkish central bank is widely expected to hike interest rates to prop up the lira. So it is certainly good news that the Bank Indonesia is allowing the supply and demand conditions to a large extent to determine the rupiah rate. However, this happens only a few weeks after the bank a raised its key policy rate by 50bp in a surprise move. Bank Indonesia should ease - not tighten - monetary policy Looking at what I consider the two key macroeconomic indicators for monetary conditions - the nominal GDP growth and the GDP deflator - I think we can safely conclude that monetary conditions have tightened substantially over the past year or so. In that sense it hard to justify Bank Indonesia's rate hike a couple of week's ago. However, it is clear that Bank Indonesia was making the same mistakes as many other central banks around the world - the central bank was tightening monetary conditions in response to a negative supply shock - primarily higher food prices and to a weakening currency. Importing monetary tightening from China? I have earlier argued that Brazil was importing monetary tightening from China and I believe that there are good arguments that Indonesia has been doing the same thing.


WORLD LEADING ADVISORY SPECIALISING IN THIS TOPIC

GET NEWSLETTER

Sign up now to receive the latest blog posts and news about our research.