Bank Indonesia (BI) unexpectedly kept its policy rate unchanged at 5.75%, defying market expectations for a 25 basis point rate hike, according to MUFG’s Lloyd Chan [1]. The decision was attributed to the recent stabilization of the Indonesian rupiah, which provided policymakers with the flexibility to pause rate increases for the time being [1].
Governor Perry Warjiyo emphasized that targeted measures to attract foreign inflows, such as raising SRBI yields and reducing hedging swap costs for investors, are likely to be more effective in supporting the currency than further interest rate hikes [1]. Despite these efforts, MUFG maintains that further tightening by BI may still be necessary due to elevated US Treasury yields and ongoing global uncertainties [1].
Additionally, BI anticipates that the US Federal Reserve will tighten policy in the fourth quarter, which could influence the rupiah and necessitate additional policy responses [1]. While the recent FX-supportive measures are expected to help moderate the pace of rupiah depreciation, the risk of further tightening remains, according to MUFG [1].
CONCLUSION
Bank Indonesia’s decision to hold rates surprised markets, but ongoing global uncertainties and expectations of further Fed tightening suggest that additional BI rate hikes may still be on the horizon. Targeted inflow-support measures are currently favored, but the risk of further tightening persists.