FX.co ★ Indonesia Central Bank Unexpectedly Hikes Rate

On Wednesday, Bank Indonesia took the market by surprise, raising the interest rate by a quarter point in an effort to bolster the rupiah. Supervised by Perry Warjiyo, the Board of Governors opted to increase the seven-day reverse repo rate from 6.00 percent to 6.25 percent; a level not seen since 2016 when the bank implemented the seven-day reverse repo as its primary policy rate.

Moreover, the bank has managed the tight fiscal policy, holding rates for five successive meetings, and has observed a cumulative raise of 275 basis points since August 2022. The deposit facility rate was also heightened to 5.50 percent, in tandem with the lending facility rate, which saw an increase to 7.00 percent.

Despite making the calculated decision in spite of expectations to maintain rates, Perry asserted that the move was more of a preventive measure aimed at keeping inflation within 1.5 to 3.5 percent for the current fiscal year. March saw inflation sit at 3.05 percent.

The rupiah has seen its value decline by approximately 5 percent against the US dollar since the start of the year, notwithstanding interventions by the central bank. The country anticipates an economic growth rate between 4.7 and 5.5 percent for this fiscal year.

As per Gareth Leather, an Economist at Capital Economics, while the central bank made its intent clear about its primary focus on currency support in the forthcoming months, there remains a strong possibility that this might be a one-off event, provided the currency regains stability soon. He also speculated that the bank could remain cautious about exacerbating the cycle of tightening, given that inflation is relatively under control.

Leather also anticipated the possibility of the Bank of Indonesia trimming interest rates at their October meeting, following the U.S. Federal Reserve's speculated first cut in September.