Bank Indonesia faces mounting pressure to hike after MSCI threat fuels market rout
Bank Indonesia faces growing pressure to raise rates after MSCI’s threat to cut its market to standalone status triggered a rout in stocks, weakened the rupiah.
Key points
- Bank Indonesia is under pressure to raise rates on Wednesday after MSCI warned of a possible downgrade.
- Citibank expects a 50 basis-point hike to 6.25%, while Capital Economics and Permata Bank expect 25 basis points to 6%.
- The rupiah weakened to 18,030 per dollar on Tuesday, near its June record low.
Bank Indonesia faces growing pressure to raise interest rates on Wednesday after MSCI warned it may downgrade the country's stock market from emerging-market status, triggering a selloff in stocks and the rupiah. The central bank has kept its benchmark seven-day reverse repurchase rate at 5.75% since June.
Citibank now expects a pre-emptive 50 basis-point increase to 6.25%, dropping its earlier forecast of no change. Capital Economics and Permata Bank expect a 25 basis-point hike to 6%.
Market reaction and currency
MSCI said Friday it is considering moving Indonesia to "standalone" status, which it has held since 1989 as an emerging market. The Jakarta Composite Index suffered its worst two-day sell-off on record before recovering about 3% Tuesday, after authorities announced steps to improve market transparency and price discovery, including expelling tightly held companies from the flagship index.
The rupiah weakened to 18,030 per dollar on Tuesday, near its June record low, and has fallen about 8% this year.
Not delivering a rate hike [on Wednesday] would run the risk of disappointing investors and fueling further downward pressure on the currency
— Jason Tuvey
Warnings from economists
Jason Tuvey of Capital Economics said holding rates could disappoint investors and add pressure on the currency, and might revive concerns that Bank Indonesia is "kowtowing to political pressure." Citi's Helmi Arman said a hike would aim to stop equity outflows from spilling into bonds; he expects a one-off move followed by other support measures.
Permata Bank's Josua Pardede estimated foreign investors have net sold about $5 billion of Indonesian stocks this year. He said an MSCI downgrade could force $3 billion to $5 billion of passive outflows, with another $15 billion of actively managed foreign money exposed to reassessment.
