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The Federal Reserve‘s pause in interest rate hikes is a relief for many emerging economies, and represents an opportunity for Indonesia to accelerate growth, the Asian country’s finance minister told CNBC on Monday.
Credit Suisse Asian Investment Conference in Hong Kong.
“Because this pause in increasing rates is also showing that the global economy environment is not good. So we really have to be very careful in seeing this signal,” she added.
The U.S. central bank surprised investors by adopting a sharp dovish stance last Wednesday, projecting no further interest rate hikes this year, and justifying its more temperate outlook by cutting 2019 growth outlook for the world’s largest economy.
Meanwhile, a raft of weak economic data around the world also stoked recession fears.
Germany’s manufacturing activity dropped to its lowest level in more than six years in March, according to data from IHS Markit; while in the euro zone as a whole, manufacturing fell to its lowest level since April 2013.
The halt in rate hikes — and the Fed signalling in January that it will be “patient” with monetary policy — is “relieving pressure” for many emerging economies, Sri Mulyani said. That’s especially welcome for Indonesia, Southeast Asia’s largest economy, as it suffers from capital outflows, she said.
Emerging economies as a whole have experienced large outflows of capital, triggered by higher interest rates in the U.S., as investors search for better yields stateside.
Capital outflows “create quite a lot of the depreciation of the currency, then also create a certain … confidence problem,” the minister said.
The Indonesian rupiah was one of the worst performing emerging currencies last year, and fell to its weakest level in more than 20 years at one point. Analysts have attributed the rupiah’s weakness to the country’s current account deficit and mayhem in emerging markets in 2018.
Indonesia’s central bank last year introduced several measures to support its currency — such as raising interest rates seven times, and tapping its foreign cash reserves to buy up the rupiah.
But last week, Bank Indonesia opted to keep its rate on hold.
“This was expected by the market, given the dovish stance of the US Federal Reserve which has given the Indonesian rupiah an added boost,” Nicholas Mapa, ING’s senior economist for Philippines, said in a note last week. “Rumblings that the Federal Reserve would be ‘patient’ on rate hikes had helped push funds back into emerging markets this year with the IDR (rupiah) recovering in the first few weeks of 2019.”
— CNBC’s Fred Imbert contributed to this report.