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Interest Rate Cut by Fed and BI, Rupiah Weakens

Interest rate cuts by two central banks, the Fed and Bank Indonesia, depressed the Rupiah. Rupiah exchange rate against U.S. Dollar was observed to weaken slightly. What causes this movement? The Fed decided to reduce interest rates by 25 bps to the 2% area. 

The Fed Rate Cut is accompanied by a subsequent projection of interest rates that are quite diverse from FOMC members. Of the 17 policymakers who are members of the committee, only 7 people agreed to a further rate cut in the remainder of 2019.

This shows that the Fed is not too dovish this time, thus making the U.S. Dollar strengthen against Asian currencies including the Rupiah. Shortly after the announcement, USD / IDR had risen to touch the level of 14,099. 

On the same day as the Fed Rate Cut announcement, Bank Indonesia (BI) also officially announced a cut in the benchmark interest rate or better known as the BI 7 Days Reserve Repo Rate by 25 basis points, from 5.5% to 5.25%. This rate cut is the third time in 2019. 

 

Rupiah Weakened Hold After BI Rate Cut

Previously, BI also cut interest rates in July and August, with a value of 25 bps each. This BI policy is expected to increase the pace of the Indonesian economy. Perry explained that since the beginning of this year, BI has focused on encouraging economic growth as well as preventing the impact of world trade tension. 

One way is to reduce interest rates three times during the last 3 months in a row. BI's policy of easing interest rates is expected to be able to encourage credit and financing demand. Likewise, with the strengthening of the Rupiah.

BI is optimistic that a third interest rate cut will get a positive response to the Rupiah exchange rate. This expectation was strengthened by the experience of the Rupiah's response to the BI Rate Cut in the previous two periods. In line with this announcement, the Rupiah strengthened to around IDR 14,058.

The Fed cut its benchmark interest rate by 25 basis points to 2.0 percent to secure economic expansion amid the threat of a global economic slowdown and the impact of a trade war. The Federal Reserve cut interest rates by 25 basis points from 2.25 percent to 2.0 percent, in line with previous market expectations. 

U.S. Dollar Gets Stronger after the Cut of Interest Rate

This is the second time for the Fed to cut interest rates in the past decade. In general, Fed Chair Jerome "Jay" Powell said that the current condition of the U.S. economy is good, reflected in a strong labor market and inflation trends that are likely to remain in the target range of 2 percent until the end of 2019. 

However, the Fed still feels the need to cut interest rates to maintain the expansion of the U.S. economy which was quite affected by the trade war. The new projections after the cut of 25 basis points this week show that the majority of FOMC members want interest rates to remain in the current range until the end of 2019.

However, the decision was not approved by all Fed policymakers. There are 7 out of 17 policy-making members who agree with one more cut of 25 basis points in the rest of the year. Meanwhile, the other five members want interest rates to be raised again at the end of the year.

After the Fed cut interest rates to 2.0 percent, the US Dollar does not show any weakness at all versus other major currencies. This condition is reflected in the movements of the U.S. Dollar Index which at the time of this news was written at 98.60, which rose significantly from the daily Open level.

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