Bank Indonesia is using bond purchases to support the rupiah and help fund the government’s Covid-19 response. Too much quantitative easing, though, could backfire and fuel worries about the accommodation of unfettered government spending.
Critical for reassuring investors, in our view, is that the central bank stick to its pledge to cap bond purchases in the primary market at 25% and intervene only as a last resort. If these promises are broken, QE could weigh on the rupiah like a pair of cement shoes.
Emerging market central banks embarking on QE might already be skating on thinner ice than peers in developed markets. Bank Indonesia, for one, has a shorter track record for demonstrating independence from political interference.
The relative strength of the Rupiah is a standout relative in Asia and is mirrored by the stability of the Philippine Peso. Both countries have deployed quantitative easing to support their respective bond markets and short up their currencies.Click HERE to subscribe to Fuller Treacy Money Back to top