Bank Indonesia (BI) voted for currency stability by delivering an unexpected rate hike on Octobers meeting, after staying on hold since February 2023. In a move that is reminiscent of its hawkish posture in 2018, the authorities tightened policy to ward off speculative bets on the currency, particularly as the IDR has underperformed its peers by a larger extent than warranted. The currency has been under pressure, owing to a dollar rally, narrowing policy differentials (ID vs US), and weak portfolio flows. The currency erased its year-to-date gains with a sharp -5.4% drop in 2H23, trailing its regional peers.
Indonesian policymakers face a policy dilemma as global uncertainties outweigh recent positive domestic data outturns. The US Federal Reserve’s ‘higher for longer’ interest rate narrative has pushed up the US dollar and yields, whilst narrowing rate differentials have complicated the domestic balance of payments (BOP) math.
Policy maker to keep the door open for further policy tightening
In a move that is reminiscent of its hawkish posture in 2018, DBS Group Research expect the authorities to keep the door open for further policy tightening to mitigate risks from a higher US terminal rate and support the domestic BOP position.
BI expects the US Fed to tighten policy further in December, which could fan the US dollar and narrow rate differentials yet again. Against this backdrop, we build in the risk of one more rate hike this quarter to take the domestic policy rate to a peak of 6.25%, before returning to an extended pause in 1H 2024.
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