Bank Indonesia Defies Market Expectations with Rate Hike... Defends Rupiah Decline

President Yoon Suk-yeol and his wife Kim Keon-hee took a commemorative photo with Indonesian President Joko Widodo and his wife at the Presidential Palace in Jakarta on the 8th of last month (local time). [Image source=Yonhap News]

Bank Indonesia (BI) made a surprise interest rate hike to prevent the depreciation of its national currency.

On the 19th (local time), BI announced after its monetary policy meeting that it would raise the 7-day reverse repurchase agreement (RRP) rate, which serves as the benchmark interest rate, from 5.75% to 6.0%, an increase of 0.25 percentage points.

Previously, BI had implemented six consecutive rate hikes from August last year to January this year to curb soaring inflation following the COVID-19 pandemic. As a result, the benchmark rate rose from 3.5% to 5.75%.

However, BI kept the rate unchanged for eight consecutive months thereafter. This recent rate hike is the first in nine months since January.

Since Indonesia’s inflation rate is stable at 2.3% annually, the market expected BI to either keep the benchmark rate steady again or cut it ahead of the presidential and legislative elections scheduled for February next year, but a 'surprise' hike was made instead.

It is interpreted as a response to defend the rapidly depreciating rupiah against the US dollar in recent times.

The rupiah exchange rate was around 14,700 rupiah per US dollar in April but recently rose to 16,000 rupiah per US dollar due to the strong dollar effect.

BI Governor Perry Warjiyo explained, "This is a preemptive measure to strengthen rupiah stabilization efforts in preparation for the impact of increased global uncertainties and to mitigate the effect of imported goods on inflation."

This content was produced with the assistance of AI translation services.