Indonesian Rupiah: BI may still need to tighten – MUFG

MUFG’s Lloyd Chan reports that Bank Indonesia kept its policy rate at 5.75%, surprising expectations for a hike, as recent Rupiah stabilization allowed policymakers to stay on hold. Governor Perry Warjiyo favors targeted inflow-support measures over higher rates, but MUFG still expects further BI tightening due to elevated US Treasury yields and global uncertainties.

BI holds but tightening risk remains

"In Indonesia, Bank Indonesia (BI) left its policy rate unchanged at 5.75% yesterday, defying market expectations for a 25bp rate hike. The recent stabilization of the rupiah appears to have given policymakers room to remain on hold for now."

"Governor Perry Warjiyo also emphasized that targeted measures to attract foreign inflows are likely to be more effective than higher interest rates in supporting the currency. Such measures include raising SRBI yields and reducing hedging swap costs for investors."

"That said, BI expects the Fed to tighten policy in Q4. While recent FX-supportive measures should help moderate the pace of rupiah depreciation, we believe further BI tightening may still be required given elevated US Treasury yields and heightened global uncertainties."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)