June 19, 2018 / 6:35 AM / 3 months ago

UPDATE 2-Indonesia c.bank says may hike rates again next week, signals credit concerns

(Adds analyst comment, context)

By Gayatri Suroyo

JAKARTA, June 19 (Reuters) - Indonesia’s central bank said on Tuesday it is ready to respond to the U.S. Federal Reserve’s interest rate increase with another hike of its own to defend the currency, as well as loosen mortgage rules to pump-prime domestic credit growth.

Indonesia, along with India and the Philippines, the other two Asian economies running current account deficits, have fallen victim to a rout in emerging markets in recent months as the Fed has signalled further interest rate increases. That in turn has lured more funds toward U.S. dollar-denominated assets.

But, unlike the other two economies, Indonesia is facing sluggish domestic consumption growth, a headache for President Joko Widodo as he bids for another mandate next year.

Twinning a rate hike with looser mortgage rules highlights a major policy dilemma: while Indonesia needs to be competing for funds internationally, it is also wary that higher interest rates may deal a body blow to already subdued domestic demand.

“Indonesia is hiking not because of their own growth-inflation mix,” said Eugenia Victorino, Asia economist at ANZ in Singapore.

“Even before the volatility in emerging markets they were below their credit growth targets. With higher funding costs, credit growth will be further stifled ... so they have to offset that.”

Victorino estimates that every 100 basis points in higher interest rates shaves off 0.1-0.2 percentage points in annual economic growth. Looser mortgage rules would take more time than rate hikes to filter through, she said.

In a statement on its website on Tuesday, Bank Indonesia said it will consider those options at its next policy review meeting on June 27-28, also partly in response to the European Central Bank’s policy direction.

BI raised its benchmark interest rate twice in May by a total of 50 basis points to 4.75 percent to defend a fragile rupiah.

“Double intervention policies, more liquidity, and intensive communication will also be continued (in addition to those options),” the statement said. BI has previously said on Twitter it would continue to intervene in both forex and bond markets.

Newly appointed central bank governor Perry Warjiyo has sought to ease investor concerns and pledged to communicate more on hedging options and to provide “a rational expectation” of where the rupiah is headed.

The rupiah has been caught up in an emerging market selloff and is among the worst-performing currencies in Asian markets this year, down about 5 percent despite the two rate hikes and heavy central bank buying.

Adding to the concerns over rising Treasury yields and a strong dollar, investors are also grappling with trade war and growth anxiety as a fresh wave of risk aversion grips emerging markets.

Foreigners own nearly 40 percent of the Indonesian government’s bonds, which is why the BI’s response has been more aggressive than in India and the Philippines, which hiked only once so far this year.

In 2013, during the so-called “taper tantrum”, BI raised rates by 175 basis points.

The central bank has said guarding the rupiah is a priority but that any measures taken should not hurt economic growth.

Indonesian markets are closed for the Islamic Eid holiday and will reopen on June 20. (Reporting by Gayatri Suroyo in JAKARTA and Marius Zaharia in HONG KONG; Writing by Kanupriya Kapoor, Marius Zaharia; Editing by Sam Holmes & Shri Navaratnam)

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