Will Bank Indonesia Raise Rate To Support The Rupiah?

Forex News

Today is the next meeting of the Bank Indonesia. Analysts suggest that the instability of financial markets and the fall in the national currency could force Indonesia's central bank to raise interest rates, even though tightening monetary policy is not very desirable for the country's economy.

The Bank Indonesia's key interest rate is now 4.25%. If Indonesia raises rates, this will be the first hike since November 2014. It cut rates by 200 basis points during 2016 and 2017 to try to stimulate lending and economic growth. Economists forecast that Bank Indonesia would raise benchmark interest rates to support the rupiah.

The rupiah fell more than 5% to 14.000 per dollar in four months, while Indonesian 10-year bond yields rose more than one percentage point during that period. The JKSE stock index fell by 7% this year.

Bank Indonesia tried to stabilize the rupiah, intervening both in the foreign exchange market and bond markets, but its foreign exchange reserves in February-April decreased by $7.1 billion. Investors reduced their investment in the Indonesian market to about $4 billion, against the backdrop of higher oil prices and a rising US bond yields. Thus, the economy of Indonesia, which is the largest in Southeast Asia, suffered significant losses.