Indonesia hikes rate to arrest rupiah slide
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Indonesia hikes rate to arrest rupiah slide

Currency trading at pandemic-era lows is Asia's third-worst performer

An employee counts Indonesian rupiah banknotes at a currency exchange office in Tanggerang, Banten, Indonesia, on April 17. (Photo: Bloomberg)
An employee counts Indonesian rupiah banknotes at a currency exchange office in Tanggerang, Banten, Indonesia, on April 17. (Photo: Bloomberg)

The Indonesian central bank on Wednesday raised its benchmark interest rate to a record high, in what is seen as a one-and-done move to support the rupiah that has hit pandemic-era lows.

Bank Indonesia increased the BI-Rate by 25 basis points to 6.25%, a move predicted by only 11 of 41 economists surveyed by Bloomberg. The rest had expected no change.

Current conditions require a strong policy response to mitigate risks to the Indonesian economy, central bank governor Perry Warjiyo said in a virtual briefing.

He was referring to uncertainties from a delay to the anticipated rate cuts by the US Federal Reserve and rising geopolitical tensions in the Middle East.

The decision, which lifts the rate to a new high since the benchmark was introduced in 2016, is aimed at supporting a currency that has lost nearly 5% against the US dollar this year. The BI has a mandate to stabilise the rupiah and through it manage inflation.

While inflation has been within the central bank’s target range of 1.5% to 3.5% this year, a weaker rupiah risks fanning inflation by making imports more expensive.

The hike could set the tone for other Asian emerging-market central banks that are seeing their currencies hammered by a strong dollar, with geopolitical tensions adding a new layer of risk.

Bank Indonesia is confident that headline inflation will stay within target this year and the next, the governor said.

The rupiah extended an earlier gain after the decision, trading 0.5% higher at 16,145 per dollar amid broad greenback weakness.

The move trims the rupiah’s slump this month to 1.8%, the third worst performer in Asia as it succumbs to dollar strength spurred by expectations the Fed may delay cutting rates as well as high seasonal demand for dollars.

The local currency still remains among the region’s worst performers so far in April, after dropping past the 16,000 psychological level last week — to its weakest since April 2020.

BI has made it “clear that supporting the currency would remain its key priority over the coming months”, according to Capital Economics. This hike, however, shouldn’t be read as a signal for the start of a prolonged cycle, given that inflation is very low and growth is only modest, with GDP expansion forecast at 4.7% to 5.5% this year.

Foreign funds have sold a net $583 million in Indonesian government bonds so far during the month.

That has spurred Bank Indonesia to intervene “more boldly” in the spot and derivatives markets to moderate sharp swings in the exchange rate. It has also offered hefty premiums on its rupiah securities to lure more foreign inflows.

Beyond the central bank, the government has also ordered state-owned enterprises to refrain from making large dollar purchases and told exporters to repatriate their earnings.

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