Commerzbank’s Charlie Lay reports Bank Indonesia kept the BI Rate at 5.75%, choosing targeted capital-flow incentives over further tightening to support the Indonesian Rupiah. BI cut hedging costs and improved macroprudential liquidity tools, echoing RBI’s playbook. Lay notes USD/IDR’s pullback gives some breathing room, but warns the Rupiah is still vulnerable and another 25 bp hike later this year cannot be ruled out.

Capital-flow tools to back rupiah

"Bank Indonesia (BI) left the BI Rate unchanged at 5.75%. In a Bloomberg survey, analysts were evenly split, with a slight majority expecting a 25bp hike. This was on the view that BI will continue to hike to support the currency and shore up investor confidence."

"The Indonesian rupiah (IDR) has come under pressure this year amid higher oil prices and growing concerns over fiscal discipline and policy credibility. Governor Perry Warjiyo acknowledged that another rate hike had been considered. However, the board expressed concerns over the negative consequences on domestic borrowing costs and consumption, particularly given that it had already hiked by 100bp in two months."

"Instead, BI opted to leave rates unchanged and rely on targeted financial incentives to attract foreign capital and support the rupiah. The strategy echoes the Reserve Bank of India's approach of supporting the currency through capital-flow measures rather than relying solely on higher policy rates."

"The recent pullback in USD/IDR from above 18,200 to around 17,900 has given BI some breathing room, but the rupiah is unlikely to be out of the woods. A sustained recovery will still depend on stronger policy credibility and continued foreign capital inflows."

"Higher oil prices, renewed safe-haven demand for USD, and lingering concerns over fiscal management remain key risks. While BI has paused for now, another 25bp rate hike later this year cannot be ruled out if depreciation pressures re-emerge."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)