Bank Indonesia hikes its interest rate to 6.25% in a surprise move to maintain currency stability (Business Brief No.4056)

• Bank Indonesia (BI) raised its policy rate by 0.25 percent at its April 24 meeting, from 6.00 percent to 6.25 percent (Figure 1), contrary to market expectations that BI would keep the rate unchanged. This move brings the current rate to its highest level since the introduction of the benchmark interest rate in 2016.
• BI’s interest rate increase is aimed at shoring up the Rupiah, which recently hit its lowest level in four years (since March 2020), standing at Rupiah 16,155 per US Dollar, representing a 4.7-percent depreciation since the beginning of 2024. The Rupiah ranks as the fifth-weakest currency in Asia (following the Yen, Baht, Taiwanese Dollar, and Korean Won, respectively) (Figure 2).
• Additionally, the rate hike is aimed at keeping Indonesia’s inflation rate within the central bank's target range of 1.5 percent to 3.5 percent set for 2024. Inflation has risen since the beginning of the year, reaching 3.0 percent in March (Figure 3) – the highest level since August 2023 – driven by increased demand for goods during Ramadan and rising food prices. Meanwhile, the Rupiah’s depreciation has led to higher prices of imported products, impacting domestic consumption.
• Persistent weakness in exports, as seen from the previous year, has affected the country’s economy and external stability. Its current account deficit is poised for a potential increase from its low level of 0.1 percent of GDP in 2023 (Figure 4), adding pressure for the central bank to implement its tightening monetary policy in an effort to maintain currency stability.
• As for Indonesia’s interest rate trends, KResearch holds the view that this interest rate hike by BI is likely a one-time adjustment mainly aimed at stabilizing the Rupiah. However, if the US Federal Reserve (Fed) further postpones its policy rate cut at the September 2024 FOMC meeting, as expected by the market, this would exert pressure on all regional currencies.