Indonesia Raises Rates Again as Rupiah Defense Continues

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(Bloomberg) — Indonesia’s central bank raised its key interest rate for a third time in about a month, extending its aggressive efforts to stabilize the rupiah and shore up investor confidence.

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Bank Indonesia lifted the benchmark BI-Rate by 25 basis points to 5.75% on Thursday, in line with the majority of analysts surveyed by Bloomberg News. 

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The latest increase follows Bank Indonesia’s surprise hike June 9 and a bigger-than-expected 50 basis point increase in May, bringing total tightening to 100 basis points this year. 

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The moves underscore policymakers’ determination to halt the rupiah’s slide and prevent currency weakness from feeding into broader price pressures. The bank said in a statement that Thursday’s decision was aimed at strengthening the currency and attracting foreign portfolio investments. 

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The rupiah pared most of its losses and yields on 10-year government bonds rose after the decision, while stocks held an earlier decline of 1.5%. Before Thursday’s decision, the currency had gained about 2% from a record low after the surprise rate hike last week.

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Governor Perry Warjiyo said in a briefing that the rupiah will continue to stabilize, supported by the bank’s measures and the economy’s strong fundamentals.

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Investors have said recent gains in the rupiah may be temporary unless monetary tightening is supported by more consistent and market-friendly policy adjustments, including more efficient fiscal spending, clearer communication and a more predictable regulatory environment under President Prabowo Subianto. 

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Emerging market assets could be under further pressure as the Federal Reserve, which left interest rates unchanged earlier Thursday, signaled support for raising borrowing costs later this year under new chair Kevin Warsh.

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Bank Indonesia sees the possibility of further Fed rate hikes to tame inflation, Warjiyo said, noting that US Treasury yields continue to rise. 

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Market-watchers have also cautioned that higher rates alone likely won’t attract sustained capital inflows, particularly after the government unveiled plans for a new state-backed commodity export agency. That has raised concerns about market intervention and potential disruptions to export flows that support the rupiah.

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Meanwhile, higher food and energy costs, together with the lagged impact of currency weakness on imported goods, have also raised the risk that inflation may become more persistent in the months ahead. 

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The dry season and a possible intensifying El Nino later this year could add further pressure to food supplies, complicating Bank Indonesia’s efforts to keep inflation expectations anchored.

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—With assistance from Prima Wirayani and Claire Jiao.

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(Updates to add bank statement in fourth paragrapn, market reaction in fifth paragraph.)

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