Indonesia’s central bank raised interest rates to their highest level in seven years on Wednesday, an unexpected move to bolster the rupiah, which remains weak against the dollar after repeated currency market interventions.
Bank Indonesia
Economists expected Bank Indonesia to keep the seven-day reverse repurchase rate at 6%, but it instead boosted it 25 basis points to 6.25 percent, a level not seen since 2016. It hiked its other two primary interest rates by 25 basis points as well.
“The interest rate increase is to strengthen the rupiah’s exchange rate stability against the possibility of worsening global risks,” Bank Indonesia governor Perry Warjiyo said at a news conference on Wednesday.
Since recovering from the Covid-19 pandemic, Bank Indonesia has joined other global central banks in tightening monetary policy to battle soaring inflation.
Tightening Monetary Policy
The price increase has been fueled in part by Russia’s invasion of Ukraine, which has exacerbated global energy and food price increases, as well as supply chain disruptions and pandemic-related economic concerns.
Bank’s 1.5-3.5% target
Perry described the action as a “pre-emptive and forward-looking step” to keep inflation within the bank’s 1.5-3.5% target range. It is currently at 3.05%.
The rupiah has outperformed regional counterparts against a strengthening US dollar, but it has nevertheless fallen more than 5% since the beginning of the year, Perry noted, despite a slew of measures to maintain the currency.
The dollar has been buoyed by receding expectations about how many times the Federal Reserve will lower borrowing costs this year, as US inflation remains stubbornly above its target. Economists predicted that if the rupiah continued to fall, Bank Indonesia would tighten even harder.
“The central bank has been intervening in foreign exchange markets to support the currency, and we thought it would continue with this strategy rather than resume its tightening cycle,” said Gareth Leather, senior Asia economist from Capital Economics. “In the event of further weakness in the rupiah, then more hikes are likely.”
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