Indonesia Raises Key Rate by Half-Point Again to Aid Rupiah
Comment of the Day

October 20 2022

Commentary by Eoin Treacy

Indonesia Raises Key Rate by Half-Point Again to Aid Rupiah

This article from Bloomberg may be of interest to subscribers. Here is a section:

The central bank will defend the rupiah in line with fundamentals, Warjiyo said. It will monitor forex supply, and strengthen the currency stabilization policy, he added.

“The hike reflects less concern of inflation but more on the need to anchor FX stability,” said Wellian Wiranto, economist at Oversea-Chinese Banking Corp. in Singapore, who now sees a terminal rate of 5.25%. “Going forward, downside risks to growth will gain more prominence.”

A weakened rupiah threatens to fan imported inflation, adding to the risk posed by higher fuel costs that’s sent consumer price gains to a fresh seven-year high of 5.95%. Bank Indonesia expects inflation to climb further to 6.3% at the year-end before returning to its 2%-4% target next year.

The central bank retained its 2022 growth forecast for the economy, expecting it to be at the upper end of its 4.5%-5.3% target, while flagging risks from a slowing global recovery. For now, it expects to end the year with a current account surplus of 0.4%-1.2% of gross domestic product -- better than its previously estimated 0.5% of GDP.

Eoin Treacy's view

The Indonesian Rupiah spent most of 2021 in a tight range relative to the Dollar but broke down in May and is now trending lower. The pass through of inflationary pressures from the developed world into ASEAN didn’t pick up until early this year. Many ASEAN countries did not engage in the same degree of monetary stimulus so effect was delayed. However, the surge in energy prices is increasing the cost of fuel subsidies and putting downward pressure on regional currencies.

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