Friday, September 13, 2013

Bank Indonesia Surprises With Rate Increase

Bank Indonesia Surprises With Rate Increase 
In order to protect its currency, the central bank of Indonesia has opted to increase their policy interest rate to 7.25% after having raised it by half a percent only two weeks prior. Even as other currencies, such as the Indian rupee, begin to recover, the Indonesian rupiah has continued to lose value.
Some argue that increases in the interest rate are a way to restore confidence in the Indonesian economy. They feel that this move will help to keep economic recovery fresh in investors’ minds. Opponents argue that it is dangerous for the bank to take such a stand in the face of a slowing global economy. They do not believe that this move will be of any real help to the economy and only serves to keep portfolio investors content.
Due to Indonesia’s recent growth, the country has encountered a trade deficit aided by its commodity exports to China. With this economic growth, domestic demand greatly increased leading to an increase in the amount of imported consumer goods as well as oil.
With current changes in the economic climate, Indonesia’s growth has begun to slow down. A decrease in demand from China, coupled with an increase in U.S. interest rates, has led to the slowdown of the growth rate in Indonesia.
Even with the attempts by the central bank to safeguard Indonesia’s currency, it continues to devalue, falling by about 15% in the current year thus far. There are some who feel that such actions from the central bank are nothing but panic over losing control of the currency. They feel that this increase can be nothing more than a short-term solution that will end up hurting the Indonesian economy in the long run.

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