Aug 24, 2022 03:41AM ET
Indonesia's first interest rate hike in four years made the country's central bank one of the last to abandon pandemic-era monetary settings, but it also gave investors reason to remain optimistic about one of the world's most resilient emerging markets.
Bank Indonesia raised its key interest rate on Tuesday as it signalled faster inflationary pressures, surprising most analysts less than a week after Governor Perry Varijo said there was no need for tightening measures.
The rate hike, which Wargiejo described as "preemptive," comes after the central bank has talked about lowering inflation for months, raising concerns among some investors that policymakers were assessing risk too casually and relying too heavily on price controls.
Other investors also liked the rate hike, which reassured them that policymakers were aware of the risks and in control of them, and heightened growth expectations also boosted confidence.
The rupee appreciated and is about 1.2 percent above its lowest level since July—more resilient than peer currencies as MSCI's broadest index of emerging-market currencies is at a six-week low
Stocks and bonds rose as well, with the Jakarta Composite Index holding steady for the week and up 9 percent year to date, despite heavy losses in most other markets.
Indonesia's 10-year bond yield has fallen almost 50 basis points from its June high of 7.544%. The spread to U.S. Treasuries has also narrowed this year, although high-yield sovereign spreads have generally widened.
Still, so far, markets seem content to back policymakers, and aside from currency, bonds best illustrate investors' nervous energy.
Yields have held up, but as a result of outflows, foreigners now hold the lowest share of the market since 2009 around 15.6%.
This is a slight drain on Indonesia's foreign exchange reserves, which fell to $132.2 billion in July but remain at a level equivalent to 6.2 months of imports, well above the international standard of three months.