Indonesia’s central bank to allow rupiah to strengthen, not targeting any level

JAKARTA: Indonesia’s central bank will allow the rupiah to strengthen in line with market movements, but will not target any level, a senior official said on Friday (Jan 10) following the currency’s rise to an over 18-month high.

Bank Indonesia (BI) “will give room for the rupiah to strengthen along with market mechanisms. Fundamentally, the rupiah is not yet overvalued,” Nanang Hendarsah, who heads the monetary management department, told Reuters in a text message.

BI is not targeting any level, but will aim to prevent the rupiah’s movements becoming volatile, he added.

The rupiah rose as much as 0.76 per cent on Friday to 13,740 a dollar, leading gains in most Asian currencies on easing US-Iran tensions. The currencies hit their lows this week after a military conflict between the two sides prompted investors to favour safe haven assets.

Governor Perry Warjiyo earlier told reporters that the rupiah’s appreciation to around 13,750 a dollar was a reflection of Indonesia’s sound economic fundamentals, and the Indonesian currency firmed further after that.

“Our economic fundamentals show that economic growth will be stronger and inflation low while stability is maintained,” he said.

Warjiyo also credited a “quite high” supply of US dollar onshore from exporters and capital inflows for the rupiah’s strength. A net total of 10.1 trillion rupiah (US$734 million) had been invested in Indonesian bonds and equities this year as of Jan 9, he said.

Friday’s gain was the rupiah’s biggest intraday rise in over four months and the unit is set to gain about 1.3 per cent for the week, the best weekly performance in a year.

The governor’s comments, plus the easing in US-Iran tensions this week only added to investors’ enthusiasm for the high-yielding currency, said Khoon Goh, head of Asia research at ANZ.

“It’s quite clear from their comments that they are not going to stand in the way of further rupiah appreciation,” he said.

“(The bank’s) view is still that the rupiah is undervalued, and if you look at the Indonesian macro fundamentals, it’s pretty stable … the rupiah offers very attractive yield and that continues to be very attractive for investors.”

In 2019, BI cut its main policy rate four times by 100 basis points (bps) and relaxed lending rules in an easing cycle aimed at lifting GDP growth.

Last year’s rate cuts rolled back some of the 175 bps that BI had increased its policy rate by in 2018, when it sought to stem capital outflows.

The governor has previously said BI will continue its accommodative policy in 2020.